Working Paper: NBER ID: w26400
Authors: Kevin Lang; Kaiwen Leong; Huailu Li; Haibo Xu
Abstract: We study roughly 11,000 loans from unlicensed moneylenders to over 1,000 borrowers in Singapore and provide basic information about this understudied market. Borrowers frequently expect to repay late. While lenders do rely on additional punishments to enforce loans, the primary cost of not repaying on time is compounding of a very high interest rate. We develop a very simple model of the relational contract between loan sharks and borrowers and use it to predict the effect of a crackdown on illegal moneylending. Consistent with our model, the crackdown raised the interest rate and lowered the size of loans.
Keywords: unlicensed moneylending; loan sharks; relational contracting; Singapore
JEL Codes: I28; I3; K42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Police crackdown on unlicensed moneylending (G21) | Increase in nominal interest rate (E43) |
| Police crackdown on unlicensed moneylending (G21) | Decrease in size of loans issued (G21) |
| Police crackdown on unlicensed moneylending (G21) | Increase in probability of loans not being repaid in full and on time (G21) |
| Police crackdown on unlicensed moneylending (G21) | Harassment activities by lenders (G21) |