Demand for credit of the agrarian reform beneficiaries in region 3: a choice between formal and informal capital markets
Date
1990-02
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Abstract
This study is an attempt to determine the variables influencing demand for credit of agrarian reform beneficiaries from formal and informal markets. Specifically, the study aims to show how different types of agrarian reform beneficiaries' borrowing behavior is affected by the price that informal lenders are willing to pay for their output, the effective cost of credit in the formal and informal sources and the value of land as collateral. In addition, the study aims to develop and estimate econometrically a model of the demand for credit from formal and informal capital markets.
The econometric exercise shows that differences in land tenure are not important in the total loan demand of sample agrarian reform beneficiaries. The results further show that the price that informal lenders are willing to pay for the output by the agrarian reform beneficiaries is not a significant determinant of the total loan demand. The
effective cost of credit yielded contrasting results. The formal effective interest rate is not a factor considered in the total loan demand, but the informal effective interest rate is negatively related to total loan demand. Similar results were also obtained in the estimation of the sample agrarian reform beneficiaries' probability to borrow from formal and informal capital markets. While differences in land tenure and output price are not important factors to consider, the results reveal that EP holders are better able to self-finance their investments. The effect of the formal effective interest rate on formal loan demand is significantly negative for all types of agrarian reform beneficiaries (except for CLT holders), while the negative effect of the informal effective cost of credit on formal loans is not only contrary to a priori expectations but also does not support the hypothesis of substitutability between formal and informal sources which states that the agrarian reform beneficiaries' probability to borrow from formal capital market is expected to be positively affected by informal effective interest rates. Meanwhile, with respect to informal loan demand, formal and informal effective interest rates are found to be insignificant except in the case of EP holders. The insignificant effect of formal effective cost of credit on informal loan demand corroborates the above cited finding that the two capital markets are not substitutes.