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Formal microlending and adverse (or nonexistent) selection: a case study of shrimp farmers in Bangladesh
Department of Economics, Umeå University, 901 87 Umeå, Sweden.
Department of Economics, Umeå University, 901 87 Umeå, Sweden.
International Institute for Environment and Development, 3 Endsleigh Street, London WC1H 0DD, United Kingdom.
Department of Economics, Göteborg University.ORCID iD: 0000-0001-7206-6568
2011 (English)In: Applied Economics, ISSN 0003-6846, E-ISSN 1466-4283, Vol. 43, no 28, 4203-4211 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 overutilise 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
2011. Vol. 43, no 28, 4203-4211 p.
Keyword [en]
Microcredit, adverse selection, informal credit
National Category
Economics
Identifiers
URN: urn:nbn:se:miun:diva-13301DOI: 10.1080/00036846.2010.491444Scopus ID: 84860399451OAI: oai:DiVA.org:miun-13301DiVA: diva2:399428
Available from: 2013-02-05 Created: 2011-02-22 Last updated: 2017-12-11Bibliographically approved

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