Article

A Cambodian smallholder farmer's choice between microfinance institutes and informal commercial moneylenders: the role of risk attitude

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Abstract

Purpose The purpose of this paper is to examine the extent to which individual risk attitude determines a Cambodian smallholder's choice between a commercial informal loan and a credit from a licensed microfinance institution. Design/methodology/approach The paper analyzes a sample of smallholder farmers in the Ratanakiri province in northeastern Cambodia, a country with a long history of microfinance and a saturated microcredit market. Employing a binary and a multinomial logit model, this paper assesses the effect of individual risk attitude on the choice of a financial instrument. Findings The results reveal a statistically significant relationship between the choice of a credit source and an individual's risk attitude: On average (c.p.) the less risk averse the smallholder is, the more they tend to prefer an unlicensed commercial lender. Practical implications The findings suggest that less risk-averse individuals tend to take up riskier and generally more expensive informal loans. Measures to increase the safe access to financial services for less risk-averse borrowers as well as improvements in financial literacy should be undertaken to protect smallholders from taking risky choices. Originality/value Although existing studies have examined the importance of risk attitudes between credit provider and borrower, they focus mainly on the lender's perspective. This paper provides new insights on how risk attitude influences the borrower's choice in Cambodia. Thus, this study is relevant for policymakers in countries with oversaturated microcredit markets and a high prevalence of informal lenders.

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... Research found that people are more attracted to loan sharks due to their flexibility in providing the services and has even reduced the demand for institutional credit (Ray, 2019). Taking loans from loan sharks was driven by community knowledge of the low risk they will receive (Possner et al., 2022) or failure to access banking (Scaglione, 2014). Loan sharks continue to have their existence in society (Venittelli, 2021). ...
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Over the past four decades, agricultural systems in the Greater Mekong Subregion (GMS) have largely evolved from a subsistence orientation toward commercial production, but the multi-faceted changes behind this evolution vary in substance and degree. Despite connoting economic progress, effects of these changes on household welfare indicators such as dietary diversity have been unclear. By taking a comprehensive view of the farm household, this study discerns the drivers of household dietary diversity in this transitional context by linking the Household Dietary Diversity Score (HDDS), as an indicator of dietary diversity, to key household characteristics, livelihood strategies and indicators of farm performance in three study sites in Cambodia, Laos and Vietnam. The Rural Household Multi-Indicator Survey (RHoMIS) tool, a combined survey and analysis platform, was employed to collect data from over 1300 farm households. HDDS is found to increase among the sites in a way that is roughly associated with their state of agricultural transition, though differing combinations of market orientation, specialisation, and intensification traits that describe such a transition suggest that the pathway to commercialisation, and dietary diversity, is not a linear one. Drivers of dietary diversity vary markedly between the sites. In the Laos site, HDDS is most closely correlated to a set of variables closely linked with agricultural transition, while in the Cambodia site it is associated more with other farm and household characteristics. In the Vietnam site, dietary diversity is correlated to the overall value of crop production. Findings point to the need to contextualise site-specific knowledge of linkages between dietary diversity and ongoing agricultural transition in the GMS, as well as policy and interventions seeking to improve dietary diversity in the face of such transition.
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This paper investigates the effects of rural households' demographic characteristics on formal credit constraint, and explores the relationship between informal and formal lending in rural China. Using 2013 China's Household Finance survey data, the authors apply probit regression models to investigate the effects of demographic factors on formal credit constraint and the household's decision to borrow from informal credit sources. In addition, the endogenous switching regression model is applied to evaluate the impact of credit constraint on the welfare of rural farm households. The empirical evidence confirms that age, family size, annual household nonagricultural income, level of education, and history of informal borrowing have significant influence over credit constraint. Moreover, annual household nonagricultural income, the presence of children, borrowing from social networks and monthly communication expenses significantly impact rural households' decision to utilise informal borrowing. Results from the endogenous switching regression model suggest that credit constraint by formal credit sources has no impact on household consumption.
Article
Purpose The purpose of this paper is to examine the relationship between credit access and technical efficiency of smallholder crop farmers in northern Ghana. Design/methodology/approach The study uses a random sample of 445 farming households in the three northern regions of Ghana. The two-stage double bootstrap DEA approach was used to consistently estimate technical efficiency scores as well as the determinants. Findings The results revealed that, given the current technology, there is substantial yield or productivity gap among the sample of producers in northern Ghana used for the study. This is because producers can reduce input use by over 50.0 percent while still achieving the same output levels. It is further revealed that proportion of household income from off-farm activities, distance of farm from homestead, location and credit access are significant determinants of technical efficiency. Originality/value The current study differs from previous studies in two basic ways. First, it takes into account the fact that smallholder farmers practise mixed or inter-cropping by using value of output so that various crops on a given plot of the farmer can be aggregated; and second, a nonparametric approach is adopted so that the inherent inconsistencies in using the two-step model within a parametric framework can be avoided.
Article
This paper analyses financial literacy and financial behavior of middle class people living an urban Asian economy. Other than most papers on financial literacy that focus on people in developed countries, we surveyed people living Bangkok. Using standard financial literacy questions, we find that financial literacy levels are largely comparable to industrialized countries, but understanding of more advanced financial concepts is lower. Similarly, savings accounts are held by most people, but more sophisticated products are a lot less common. We further show, in line with the literature, that higher financial literacy leads to improved financial decision making.
Article
Using a unique set of household-level data from the Indian state of Punjab, this paper assesses the performance and financing of dairy value chains at their upstream. We find co-existence of formal value chains driven by dairy cooperatives and private processors including multinationals and informal value chains driven by vendors or local traders and consumer-households. The resource-rich dairy farmers prefer partnerships with private dairy processors or vice versa. The small dairy farmers are more dependent on informal channels for the sale of their produce. Although, there is no significant difference in milk yield across herd sizes and value chains, the farmers associated with cooperative value chain earn more profit. The findings also indicate the practice of scale-based price discrimination in the formal segment, especially by the multinationals. Further, more than half of the dairy farmers finance their dairying activities borrowing from the formal as well as informal sources. The chain-based financing is restricted to the value chains driven by the local traders and private domestic processors. The financing by commercial banks is limited and is biased in favour of resource-rich dairy farmers.
Article
We compare seven established risk elicitation methods and investigate how robustly they explain eleven kinds of risky behavior with 760 individuals. Risk measures are positively correlated; however, their performance in explaining behavior is heterogeneous and, therefore, difficult to assess ex ante. Greater diversification across risk measures is conducive to closing this knowledge gap. What we find is that performance increases considerably if we combine single-item risk measures to form multiple-item risk measures. Results are improved the more single-item measures they contain, and also if these single-item risk measures use different elicitation methods. Interestingly, survey items perform just as well as incentivized experimental items in explaining risky behavior.
Article
This article presents evidence on the stability and behavioural validity of alternative survey mechanisms for eliciting farmers' attitudes towards risk. Three hypothetical instruments are considered that differ in terms of the simplicity, context and payoff scale of the decision presented to respondents. Responses are assessed in terms of their relative ability to explain actual farmer crop insurance purchases. Results indicate that measures of risk attitudes are poorly correlated across alternative mechanisms. The strongest positive evidence of behavioural validity is found for the gamble task explicitly defined in the context and scale of farmers' economic activities pertaining to their insurance purchase decision.
Article
Microcredit's potential for poverty reduction is a highly contested issue. In Cambodia, the dramatically increasing commercial microcredit coexists with widespread private moneylending. These two practices are rooted in different economic world views: neoliberalism on the one hand, and the traditional Khmer economic sociality permeated by patronage on the other. The ethnography shows that far from competing with each other, microcredit and private lending have adapted to form a symbiotic relationship, and much private lending is financed through microcredit. While microcredit is often beneficial to people living well above the poverty line, the widespread access to credit, through microloans as well as private lending, is threatening the livelihoods of the economically most vulnerable and precipitating their social, economic and spatial exclusion from their local communities. In contrast to the social and economic exclusion caused by land grabbing and forced evictions, which has received a fair amount of public attention, exclusion as a consequence of indebtedness has, for sociocultural reasons, remained much less visible.
Article
Purpose Using a unique dataset of a commercial microfinance institution (MFI) in Tanzania, the purpose of this paper is to investigate first whether agricultural firms have a different probability to get a loan and whether their loans are differently volume rationed than loans to non‐agricultural firms. Second, the paper analyzes whether agricultural firms repay their loans with different delinquencies than non‐agricultural firms. Design/methodology/approach The authors estimate a Probit‐Model for the probability of receiving a loan, a Heckman‐Model to investigate the magnitude of volume rationing for all loan applications and an OLS‐Model to examine the loan delinquencies of all microloans disbursed by the MFI. Findings The results reveal that agricultural firms face higher obstacles to get credit but as soon as they have access to credit, their loans are not differently volume rationed than those of non‐agricultural firms. Furthermore, agricultural firms are less often delinquent when paying back their loans than non‐agricultural firms. Research limitations/implications Even if the authors can show that access to credit and loan repayment is different for agricultural firms, the current regional focus of the MFI only allows for lending to agricultural firms in the greater Dar es Salaam area. Thus, these results might change in a rural setting. Besides general differences of the rural economic environment, the production type of agricultural firms might also differ in rural areas. Also, these results might change in different country contexts. Practical implications The findings suggest that a higher risk exposition typically attributed to agricultural production must not necessarily lead to higher credit risk. They also show that the investigated MFI overestimates the credit risk of agricultural clients and, hence, should reconsider its risk assessment practice to be able to increase lending to the agricultural sector. In addition, the results might indicate that farmers qualify less often for a loan as they do not fit into the standard microcredit product. Originality/value To the authors' knowledge, this is the first paper which simultaneously investigates access to credit and the repayment behavior of agricultural firms.
Article
The interest rate is one of the most important factors in farmers’ decision-making of borrowing and lending in the informal financial market in China. This paper explores the determinants of the interest rate with microfinance data. Results show that the income disparity, the relationship between borrowers and lenders, the usage of borrowing, and formal credit constraints are important factors affecting interest rates. More importantly, to borrow from those in the higher income hierarchy, farmers have to bear higher interest rates. We attribute this to different social capitals across income groups and higher default risks for the poor. This paper contributes to a better understanding of the informal financial market in rural China and sheds light on the mechanism of higher informal interest rate formation.
Article
Purpose Using a unique dataset of a commercial microfinance institution (MFI) in Madagascar, the purpose of this paper is to investigate how credit access probabilities and loan volume rationing magnitudes for farmers change if the MFI switches to offer flexible microfinance loans, which can account for agricultural production specifics. Design/methodology/approach The authors estimate probit models for the probability of receiving a loan and Heckman models to investigate the magnitude of volume rationing for all micro loan applications and disbursements of the MFI, differentiating between farmers with standard microfinance loans and farmers with flexible microfinance loans. Findings The results reveal that agricultural firms with flexible microfinance loans have significantly higher credit access probabilities than non‐agricultural firms and agricultural firms with standard microfinance loans. Furthermore, it was found that agricultural firms with flexible microfinance loans are stronger volume rationed than non‐agricultural firms and agricultural firms with standard microfinance loans. Research limitations/implications Even if the authors can show that access to credit for agricultural firms in Madagascar can be enhanced by the provisioning of flexible microfinance loans, the investigated MFI only introduced flexible microfinance loans in 2011 and currently only offers them through five branch offices. Thus, the product is new to the MFI, and results might change with increasing outreach to other geographic regions in Madagascar. Furthermore, the conditions for agricultural production in Madagascar are unique, and the results might change in different country contexts. Practical implications The paper's findings suggest that flexible microfinance loans can contribute to the financial inclusion of farmers with seasonal production types. They also suggest that standard microfinance loans seem to be adequate for farmers with less seasonal production types, e.g. animal husbandry. Originality/value To the best of the authors' knowledge, this is the first paper to investigate the effects of flexible microfinance loan provision for credit access of small agricultural firms in developing countries in general, and in Madagascar in particular.
Article
Access to microfinance entails a risk of over-indebtedness. A naïve present-biased micro-borrower may roll over debt after failure of an investment project financed with an MFI loan, even though she planned not to do so and would not have taken the MFI loan if she had been aware of the time inconsistency of her plan. Similarly, she may use a new loan to repay and end up over-indebted if she discounts the future too strongly relative to her true preferences.
Article
This paper reports findings from a study of 178 farm households from two contrasting areas in the Eastern Highlands of Ethiopia. It examines risk perceptions of smallholder farmers under varying contexts. The study utilized both qualitative and quantitative methods of data collection and analysis. It was hypothesized that human capital and household characteristics and orientation, access to resources, infrastructure, information and environmental factors influence perceptions of risks in different ways. Data reduction for independent variables was done by factor analysis (principal component extraction method). Factor analyses identified factors influencing smallholder farmers' perceptions of sources of risks. Logistic regression analyses were used to study the relationships of identified principal components to perceived frequencies of occurrences and consequences of various sources of risks. Logistic regression analyses revealed that asset endowments, locational settings and livelihood diversification strategies pursued determine smallholders' perceived risks. Key findings from the informal survey point out differentiation in perceptions of causes and sources of risks by different actors.
Article
This paper investigates the factors affecting the access of rural individual and group-based households to formal credit in the Mekong Delta (MD), Vietnam. Poverty levels in the Mekong Delta have reduced significantly over the last decades, but in the rural areas they remain significant. If it is assumed that access to credit is a vehicle for poverty alleviation, it is necessary to assess how households decide on borrowing. This paper identifies the determinants of the decision to borrow and of the amount that is borrowed by using the double hurdle model and Heckman selection model. Data used in this paper was obtained from a survey of 325 rural households, conducted between May and October 2009. The results indicate that household’s capital endowments, marital status, family size, distance to the market center, and locations affect the probability to ask for and amount of credit.
Article
This paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects' homes. Using a question asking people about their willingness to take risks “in general”, we find that gender, age, height, and parental background have an economically significant impact on willingness to take risks. The experiment confirms the behavioral validity of this measure, using paid lottery choices. Turning to other questions about risk attitudes in specific contexts, we find similar results on the determinants of risk attitudes, and also shed light on the deeper question of stability of risk attitudes across contexts. We conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks, occupational choice, and smoking. The question about risk taking in general generates the best all-round predictor of risky behavior.
Article
This article provides a methodological bridge leading from the well-developed theory of credit rationing to the less developed territory of empirically identifying credit constraints. We begin by developing a simple model showing that credit constraints may take three forms: quantity rationing, transaction cost rationing, and risk rationing. Each form adversely affects household resource allocation and thus should be accounted for in empirical analyses of credit market performance. We outline a survey strategy to directly elicit households' status as unconstrained or constrained in the credit market and, if constrained, to further identify which of the three nonprice rationing mechanisms is at play. We discuss several practical issues that arise due to the use of a combination of "factual" and "interpretative" survey questions. Finally, using a farm-level data set from Peru, we illustrate how the methodology can be used to estimate the impacts of credit constraints. (c) 2009 by The University of Chicago. All rights reserved..
Article
The slow diffusion of new technology in the agricultural sector of developing countries has long puzzled development economists. While most of the current empirical research on technology adoption focuses on credit constraints and learning spillovers, this paper examines the role of individual risk attitudes in the decision to adopt a new form of agricultural biotechnology in China. I conducted a survey and a field experiment to elicit the risk preferences of 320 Chinese farmers, who faced the decision of whether to adopt genetically modified Bt cotton a decade ago. Bt cotton is more effective in pest prevention and thus requires less pesticides than traditional cotton. In my analysis, I expand the measurement of risk preferences beyond expected utility theory to incorporate prospect theory parameters such as loss aversion and nonlinear probability weighting. Using the parameters elicited from the experiment, I find that farmers who are more risk averse or more loss averse adopt Bt cotton later. Farmers who overweight small probabilities adopt Bt cotton earlier.
Article
This article evaluates the performance of a rural credit market in Peru. We develop a model that shows that collateral requirements imposed by lenders in response to asymmetric information can lead not just to quantity rationing but also to transaction cost rationing and risk rationing. Just like quantity rationing, these two additional forms of nonprice rationing adversely affect farm resource allocation and productivity. We test the insights of the model using a panel data set from Northern Peru. We estimate the returns to productive endowments for constrained and unconstrained households using a switching regression model. We find that, consistent with the theory, productivity is independent of endowments for unconstrained households but is tightly linked to endowments for constrained households. We estimate that credit constraints lower the value of agricultural output in the study region by 26%. Copyright (c) 2008 International Association of Agricultural Economists.
Article
The psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes produce predictable shifts of preference when the same problem is framed in different ways. Reversals of preference are demonstrated in choices regarding monetary outcomes, both hypothetical and real, and in questions pertaining to the loss of human lives. The effects of frames on preferences are compared to the effects of perspectives on perceptual appearance. The dependence of preferences on the formulation of decision problems is a significant concern for the theory of rational choice.
Article
We conduct a large-scale economics experiment paired with a survey to examine the association between individual risk preference and health-related behaviors among adults aged 18-87 years. Risk preference is measured by the lottery choice experiment designed by Holt and Laury [Holt, C.A., Laury, S.K., 2002. Risk aversion and incentive effects. The American Economic Review 92(5), 1644-1655]. Controlling for subject demographic and economic characteristics, we find that risk aversion is negatively and significantly associated with cigarette smoking, heavy drinking, being overweight or obese, and seat belt non-use. In additional specifications, we find that risk aversion is negatively and significantly associated with the likelihood a subject engaged in any of five risky behaviors and the number of risky behaviors reported.
Article
Summary This paper examines why farm households seek informal loans in Piura, Peru, where formal lenders offer loans at lower interest rates. A panel data econometric analysis reveals that the informal sector serves various types of clients: households excluded from the formal sector but also households that prefer informal loans because of lower transaction costs or lower risk. An in-depth examination of contract terms and loan technologies permits an accurate comparison of effective loan costs and contractual risk across sectors and reveals that proximity and economies of scope enjoyed by informal lenders enable them to substitute information-intensive screening and monitoring for contractual risk and supply these various types of clients.
Small-sized enterprise loan
  • Plc Acleda Bank
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How are financial capability and financial access linked? Insights from Colombia and Mexico
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MIMOSA 2.0: mapping the (micro)credit cycle
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