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Formal microlending and adverse (or non-existent) selection a case study of shrimp farmers in Bangladesh
Umeå University, Faculty of Social Sciences, Department of Economics.
Institutionen för nationalekonomi med statistik, Göteborgs universitet.
Umeå University, Faculty of Social Sciences, Department of Economics.
International Institute for Environment and Development, United Kingdom.
2011 (English)In: Applied Economics, ISSN 0003-6846, E-ISSN 1466-4283, Vol. 43, no 28, 4203-4213 p.Article in journal (Refereed) Published
Abstract [en]

Microcredit schemes have become a popular means of improving smallholders' access to credit and making long term investment possible. However, it remains to be explored whether the current microcredit schemes are more successful than earlier formal small scale lending in identifying successful borrowers. We studied shrimp farming in a rural region in Bangladesh where formal microlending is well established, but where more expensive informal microlending coexists with the formal schemes. Farmers - both those who exclusively use formal loans and those who also use informal loans - remain credit-constrained; both types overutilize labour in order to reduce the need for working capital. However, the credit constraint is actually milder for the informal borrowers: the implicit shadow price of working capital is substantially higher in the group that only takes formal loans than in the group that also uses informal loans. These results suggest that informal lenders - with their closer ties to the individual farmers - remain more successful in identifying those smallholder farmers that are most likely to use the borrowed funds successfully. Informal lenders have an information advantage that formal microlenders lack: the latter need to find routes to access this information in order for formal microcredit schemes to succeed.

Place, publisher, year, edition, pages
Taylor & Francis Group , 2011. Vol. 43, no 28, 4203-4213 p.
Keyword [en]
Microcredit, Adverse selection, Informal credit
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:umu:diva-33864DOI: 10.1080/00036846.2010.491444OAI: oai:DiVA.org:umu-33864DiVA: diva2:318477
Available from: 2010-05-07 Created: 2010-05-07 Last updated: 2017-12-12Bibliographically approved
In thesis
1. Changing the risk at the margin: Smallholder farming and public policy in developing countries
Open this publication in new window or tab >>Changing the risk at the margin: Smallholder farming and public policy in developing countries
2010 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis consists of a summary and four self-contained papers.

Paper [I] examines whether the implementation of a social safety net programme in Ethiopia has affected the value, risk and composition of farmers‟ crop portfolios. The empirical analysis suggests that the value and risk of the crop portfolio have not been altered due to the programme. However, the programme seems to have brought about some changes in the land allocated to different crops.

Paper [II] studies how a social safety net affects farmers‟ (dis)investments in productive assets. More specifically, it studies how the Productive Safety Net Programme in Ethiopia has changed livestock and tree holdings. The results indicate no significant effect on livestock holdings, but a significant increase in tree holdings.

Paper [III] investigates if there is a problem of adverse selection in formal microlending in rural Bangladesh. The results indicate that farmers who only borrow formally have a shadow price of capital that is substantially higher than the average informal interest rate. This suggests that farmers that only borrow formally are perceived as poor credit risks by informal lenders.

Paper [IV] explores the economic incentives surrounding the cultivation of opium poppy in Afghanistan. Specifically, it examines the impact of eradication policies when opium is used as a means of obtaining credit, and when the crops are produced in sharecropping arrangements. The results indicate that both these features are likely to affect the outcome of eradication policies.

Place, publisher, year, edition, pages
Umeå: Nationalekonomi, Umeå universitet, 2010. 25 p.
Series
Umeå economic studies, ISSN 0348-1018 ; 810
Keyword
Smallholder farming, Public policy, Informal risk strategies, Microcredit, Opium eradication, Development economics, Food policy
National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:umu:diva-33854 (URN)978-91-7459-022-7 (ISBN)
Public defence
2010-06-04, Samhällsvetarhuset sal s305, Umeå universitet, Umeå, 10:15 (English)
Opponent
Supervisors
Available from: 2010-05-14 Created: 2010-05-07 Last updated: 2012-02-23Bibliographically approved

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