Informal lending in emerging markets

Bao, W; Ni, J; Singh, S

Informal lending in emerging markets

Bao, W Ni, J Singh, S

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Publication Type:: Journal Article
Citation:: Marketing Science, 2018, 37 (1), pp. 123 - 137
Issue Date:: 2018-01-01

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Field	Value	Language
dc.contributor.author	Bao, W	en_US
dc.contributor.author	Ni, J	en_US
dc.contributor.author	Singh, S	en_US
dc.date.available	2017-06-12	en_US
dc.date.issued	2018-01-01	en_US
dc.identifier.citation	Marketing Science, 2018, 37 (1), pp. 123 - 137	en_US
dc.identifier.issn	0732-2399	en_US
dc.identifier.uri	http://hdl.handle.net/10453/130317
dc.description.abstract	© 2017 INFORMS. Microentrepreneurs in emerging markets often rely on informal lenders for their routine borrowing needs. This paper investigates informal lenders’ and microentre-preneurs’ incentives to participate in a lender–borrower relationship in a market in which repayments are neither law protected nor asset secured. We consider a borrower who seeks a short-term loan, invests in a project, and repays in full using her project earnings if the project is successful. If the project fails, the borrower uses her outside option to repay over a period of time. The analysis uncovers an interesting effect of the borrower’s outside option on the loan rate offered by the lender—the loan rate first increases and then decreases with the borrower’s outside option. An important policy implication is that an increase in the outside options of the poor microentrepreneurs might actually reduce their surplus. Finally, we find that lenders in emerging markets may be more likely to engage in informal lending compared to those in developed or poorer markets.	en_US
dc.relation.ispartof	Marketing Science	en_US
dc.relation.isbasedon	10.1287/mksc.2017.1061	en_US
dc.subject.classification	Marketing	en_US
dc.title	Informal lending in emerging markets	en_US
dc.type	Journal Article
utslib.citation.volume	1	en_US
utslib.citation.volume	37	en_US
utslib.for	1505 Marketing	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Marketing Discipline
utslib.copyright.status	closed_access
pubs.issue	1	en_US
pubs.publication-status	Published	en_US
pubs.volume	37	en_US

Abstract:

© 2017 INFORMS. Microentrepreneurs in emerging markets often rely on informal lenders for their routine borrowing needs. This paper investigates informal lenders’ and microentre-preneurs’ incentives to participate in a lender–borrower relationship in a market in which repayments are neither law protected nor asset secured. We consider a borrower who seeks a short-term loan, invests in a project, and repays in full using her project earnings if the project is successful. If the project fails, the borrower uses her outside option to repay over a period of time. The analysis uncovers an interesting effect of the borrower’s outside option on the loan rate offered by the lender—the loan rate first increases and then decreases with the borrower’s outside option. An important policy implication is that an increase in the outside options of the poor microentrepreneurs might actually reduce their surplus. Finally, we find that lenders in emerging markets may be more likely to engage in informal lending compared to those in developed or poorer markets.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/130317