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Collateral, Guaranties and Rural Credit in Developing Countries: Evidence from Asia

Author

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  • Gershon Feder
  • Tongroj Onchan
  • Tejaswi Raparla
Abstract
The paper reviews the theory of the impact of loan collateral, and in particular land collateral, in institutional and non‐institutional rural credit markets. Evidence from three Asian developing countries is presented, showing extensive use of land collateral among institutional lenders in countries where such collateral is legal. The use of land collateral is more common than other forms of security, except in places where legal inhibitions on mortgaging agricultural land exist. Non‐institutional lenders are less inclined to use land collateral. However, lenders who do not have links to borrowers in matters other than finance are more likely to use loan securities. Estimates of instutional credit supply and demand in rural Thailand confirm that the pledging of land collateral affects the supply of credit more than group guaranty. It is also shown that larger farmers are more likely to utilize land collateral. The conclusion is that land collateral is preferred by instutional lenders as it reduces creditworthiness assessment costs. Attempts to ban or limit collateral use by decree are motivated by equity considerations, but they will cause loss of efficiency. Simplification of ownership verification and other policies reducing the transaction cost of collateral pledging will mitigate the negative equity implications of collateral.

Suggested Citation

  • Gershon Feder & Tongroj Onchan & Tejaswi Raparla, 1988. "Collateral, Guaranties and Rural Credit in Developing Countries: Evidence from Asia," Agricultural Economics, International Association of Agricultural Economists, vol. 2(3), pages 231-245, November.
    • Handle: RePEc:bla:agecon:v:2:y:1988:i:3:p:231-245
    DOI: 10.1111/j.1574-0862.1988.tb00054.x
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    1. Yaldız Hanedar, Elmas & Broccardo, Eleonora & Bazzana, Flavio, 2014. "Collateral requirements of SMEs: The evidence from less-developed countries," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 106-121.
    2. Jehovaness Aikaeli & Thomas Markussen, 2022. "Titling and the value of land in Tanzania," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(3), pages 512-531, April.
    3. Jean‐Louis Van Gelder, 2009. "Legal Tenure Security, Perceived Tenure Security and Housing Improvement in Buenos Aires: An Attempt towards Integration," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 33(1), pages 126-146, March.
    4. Yanling Peng & Yuansheng Jiang & Yu Hong, 2022. "Heterogeneous Preferences for Selecting Attributes of Farmland Management Right Mortgages in Western China: A Demand Perspective," Land, MDPI, vol. 11(8), pages 1-14, July.
    5. Jiang, Meishan & Paudel, Krishna P. & Mi, Yunsheng & Li, Jingrong, 2023. "Farmland transfer and rural financial structure: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).
    6. Balana, Bedru B. & Mekonnen, Dawit & Haile, Beliyou & Hagos, Fitsum & Yimam, Seid & Ringler, Claudia, 2022. "Demand and supply constraints of credit in smallholder farming: Evidence from Ethiopia and Tanzania," World Development, Elsevier, vol. 159(C).
    7. Shapi, Martin K., 2017. "Contemporary Challenges Facing the Small Farmers in the Green Scheme Projects in Namibia," Sustainable Agriculture Research, Canadian Center of Science and Education, vol. 6(3), August.
    8. Yaldız Hanedar, Elmas & Broccardo, Eleonora & Bazzana, Flavio, 2014. "Collateral requirements of SMEs: The evidence from less-developed countries," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 106-121.
    9. Qing Yang & Qing Xu & Yufeng Lu & Jin Liu, 2020. "The Impact of Public Health Insurance on Household Credit Availability in Rural China: Evidence from NRCMS," IJERPH, MDPI, vol. 17(18), pages 1-17, September.
    10. Benito Arruñada, 2017. "How to make land titling more rational," Economics Working Papers 1575, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2018.
    11. Jiang, Meishan & Paudel, Krishna & Mi, Yunsheng, 2017. "Rural Land Transfer and Financial Impact: Evidence from China," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252853, Southern Agricultural Economics Association.
    12. Emran, M. Shahe & Shilpi, Forhad, 2015. "Do Land Market Restrictions Hinder Structural Change in a Rural Economy? Evidence from Sri Lanka," MPRA Paper 66017, University Library of Munich, Germany.
    13. Woutersen, Tiemen & Khandker, Shahidur R., 2013. "Estimating the effects of credit constraints on productivity of Peruvian agriculture," Policy Research Working Paper Series 6658, The World Bank.
    14. Muhongayire, Wivine, 2012. "An Economic Assessment of the Factors Influencing Smallholder Farmers' Access to Formal Credit: A Case Study of Rwamagana District, Rwanda," Research Theses 198522, Collaborative Masters Program in Agricultural and Applied Economics.
    15. Balana, Bedru & Oyeyemi, Motunrayo, 2021. "Credit Constraints and Adoption of Agricultural Technologies in Developing Countries? Evidence from Nigeria," 2021 Conference, August 17-31, 2021, Virtual 315347, International Association of Agricultural Economists.
    16. Mario A. González‐Corzo, 2020. "Agrarian Policy Changes and the Evolution of Land Tenure in Cuba," Economic Papers, The Economic Society of Australia, vol. 39(3), pages 239-258, September.
    17. Elmas Yaldiz Hanedar & Eleonora Broccardo & Flavio Bazzana, 2012. "Collateral Requirements of SMEs:The Evidence from Less–Developed Countries," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0034, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    18. Gogodze, Joseph & Kan, Iddo & Kimhi, Ayal, 2007. "Land Reform And Rural Well Being In The Republic Of Georgia: 1996-2003," Discussion Papers 7168, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    19. Migheli, Matteo, 2016. "Land Ownership, Access to Informal Credit and Its Cost in Rural Vietnam," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201619, University of Turin.
    20. Lina Kan & Ranran Liu & Fang Su & Yan Bao, 2022. "Effect of Farmers’ Perceptions of Sustainable Development Value on Their Willingness for Agricultural Land Secured Financing," Sustainability, MDPI, vol. 14(10), pages 1-17, May.
    21. Binswanger, Hans P. & Deininger, Klaus & Feder, Gershon, 1995. "Power, distortions, revolt and reform in agricultural land relations," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 42, pages 2659-2772, Elsevier.
    22. Sudha Narayanan & Judhajit Chakraborty, 2019. "Land as collateral in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2019-006, Indira Gandhi Institute of Development Research, Mumbai, India.
    23. Harianto Harianto & M. Parulian Hutagaol & Iman Widhiyanto, 2019. "Sources and Effects of Credit Accessibility on Smallholder Paddy Farms Performance: An Empirical Analysis of Government Subsidized Credit Program in Indonesia," International Journal of Economics and Financial Issues, Econjournals, vol. 9(5), pages 1-10.
    24. Kuhn, M.E. & Darroch, Mark A.G. & Ortmann, Gerald F., 1997. "Efficacy of collateral types used by financial intermediaries in KwaZulu-Natal," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 36(4), pages 1-13, December.

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