Working Paper: NBER ID: w22686
Authors: William Jack; Michael Kremer; Joost De Laat; Tavneet Suri
Abstract: Do the stringent formal sector borrowing requirements common in many developing countries restrict credit access, technology adoption, and welfare? When a Kenyan dairy's savings and credit cooperative randomly offered some farmers the opportunity to replace loans with high down payments and stringent guarantor requirements with loans collateralized by the asset itself — a large water tank — loan take-up increased from 2.4% to 41.9%. (In contrast, substituting joint liability requirements for deposit requirements did not affect loan take up.) There were no repossessions among farmers allowed to collateralize 75% of their loans, and there was only a 0.7% repossession rate among those offered 96% asset collateralization. A Karlan-Zinman test based on waiving borrowing requirements ex post finds evidence of adverse selection with lowered deposit requirements, but not of moral hazard. A simple model and rough calibration suggests that adverse selection may deter lenders from making welfare-improving loans with lower deposit requirements, even after introducing asset collateralization. We estimate that 2/3 of marginal loans led to increased water storage investment. Real effects of loosening borrowing requirements include increased household water access, reductions in child time spent on water-related tasks, and greater school enrollment for girls.
Keywords: credit access; borrowing requirements; adverse selection; Kenya; water tanks
JEL Codes: O13; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| borrowing requirement type (F34) | loan take-up rate (G21) |
| asset collateralization (G32) | loan take-up rate (G21) |
| asset collateralization (G32) | repossession rate (G21) |
| loan take-up rate (G21) | investments in water storage (Q25) |
| investments in water storage (Q25) | household water access (Q25) |
| investments in water storage (Q25) | reduced child labor in water collection (J82) |
| investments in water storage (Q25) | increased school enrollment for girls (I24) |
| high deposit requirements (G21) | adverse selection (D82) |