Informal credit markets in Philippine rice growing areas

The informal credit markets have reemerged in the 1980s as the primary source of loans in rice growing areas in the Philippines. Previous studies of these markets are largely descriptive and lack a rigorous framework to examine informal credit markets. This study used a flexible neo-institutional economics framework to analyze the determinants of loan demand, and the determinants that match informal lenders and borrowers according to their occupational specialization.Empirical analysis based on a survey of 127 farm households in the Philippines showed the presence of several types of informal lenders with specialized trader and farmer lenders being the predominant loan source. The trader lenders linked credit with product markets, while the farmer lenders linked it to both product and factor markets. Social relations defined by kinship, patronage and reciprocity were an important facilitator of credit transactions.A Tobit model was used to estimate total loan demand. The loan demand was shown to be interest elastic, and was positively influenced by the physical and human assets owned by the borrowers, and negatively influenced by the risk aversion of the borrowers. The interest rates were competitive at the margin. The determinants that match borrowers and lenders by their occupational specialization were examined using a multinomial logit model. Poorer farmers with smaller marketable surplus were matched with farmer lenders, while the opposite was the case with rich farmers and trader lenders. The estimates confirmed a market segmentation by occupational specialization of lenders. The Tobit estimates for the observed loan sizes from trader and farmer lenders showed that the largest loans from traders went to borrowers with larger physical and human assets, while the opposite was true for loans from farmer lenders. There was little evidence of collateral specific risk due to the tenurial status of the borrowers.The informal credit markets were shown to be dynamic, innovative and competitive in rice growing areas in the Philippines. They perform efficiently without government regulation or supervision. However, viable formal financial institutions have to be developed for long-term sustainable growth.