GLOBALIZATION

ASYMMETRIC INFORMATION IN RURAL CREDIT MARKET: James Gichuki 1OutlineBackground/IntroductionModus Operandi of Rural Credit MarketsTheoretical FoundationsEmpirical Evidence in Developing CountriesCredit Markets in Northern NigeriaSouth African Low-Income Housing MarketRural Credit Market in PakistanInformal Credit Agencies in Rural IndiaEfficiency & Equity IssuesConclusions2Background/IntroductionRural credit markets have been at the center of policy intervention in developing countries over the past forty years supported by Governments, multilateral and bilateral aid agencies, and Nongovernmental OrganizationsThe results of many of these interventions have been disappointing.3Background/Introduction ctdIn spite of high levels of subsidy to rural credit in developing countries, many rural farmer-holders still depend on rural moneylenders.Interest rates for credit in rural areas still remains extremely highThese features of credit markets can be understood in the context of missing (Stiglitz and Hoff, 1990)

Samuel Addo & Nobuhle MaphosaHow does this problem become an information problem?Borrowers differ in the likelihood that they will default, making it costly to determine the risk type of each borrower (screening problem).It is costly to ensure that borrowers take those actions which make repayment most likely; moral hazard/incentives problem.It is difficult to compel repayment; the enforcement problem.Samuel Addo & Nobuhle Maphosa

Relationship between the formal and informal sectors of rural credit markets

Modus Operandi of Rural Credit MarketsIn order to serve this section of the masses several products arise;usufruct loans, kinship- and village-based credit systems, Trade-credit interlinkages, and rotating savings and credit associations. Theoretical FoundationsAkerlof 1970 The Market for Lemons Credit markets in underdeveloped countries often strongly reflect the operation of the Lemons Principle. Workings of the Lemons Principle concerns the extortionate rates which the local moneylender charges his clients.

8Theoretical FoundationsStiglitz and Weiss 1981Interest rate as a Screening DeviceIncentive MechanismThe Theory of Collaterally and Limited LiabilityObservationally Distinguishable Borrowers

Theoretical FoundationsHoff K. (1996) Market failure and distortion of WorthWealth effects in a credit marketWealth effect on the organization of workWealth effects in Agency relationships with moral hazard

Samuel Addo & Nobuhle MaphosaTheoretical FoundationsHoff and Stiglitz (1990) Imperfect information and rural credit marketStiglitz and Weiss (1992) asymmetric information in credit market

Samuel Addo & Nobuhle MaphosaEmpirical Evidence in Developing CountriesThailand (Saimwala etal )govt tried saving the farmer from the grip of the rural money lender and failed.Money lender is not an institution its a man/wife or durable good lender.Could be 5 lenders in a village 3 local, two outside traders42% were not served- low income who would not go to the bank coz they were sure to be turned down, or never needed debtsRural lender has complete infor about borrower, can monitor his activities, and be updated. The decision is joint rather than just business. a policy of allocating 10 percent of bank deposits to the rural sector would lower agricultural product prices by 1.04 percent, increase per capita real income in rural areas by only 0.3 percent (per capita real urban income increased by 1.3 percent), and increase the Gini coefficient of rural incomes from 0.575 very marginally to 0.578.Samuel Addo & Nobuhle MaphosaEmpirical Evidence in Developing CountriesNigeria (Udry, 1990) n=198 Kaduna state, kinship typeLoans were done in the forms of interpersonal, group financial schemes, rotating credit, saving associations or joint liability microfinance among others.90% of households engaged in it with only 7.5% commercial mainly from tobacco company.Formal lenders almost completely absent in the area. 97% loans between residents or relatives.Repayment periods were not explicitly stated nor interest rates stated but averaged