(DP 1993-03) From Trader to Lender: Intelinked Contracts from a Credit Market Perspective

Abstract

This paper addresses the implication of credit tying as a collateral substitute on the pattern of credit allocation in a rural financial market. Given that different lenders employ different forms of market interlinkage (e.g. labor-credit, land-credit, output-credit) or none at all, a key argument is that informal creditors differ in their abilities to deal with information and enforcement problems in the credit market. Consequently, informal lenders transact only with specific segments of the rural borrowing population about whom they are relatively well-informed and with whom they are capable of enforcing repayment. This suggests that policy interventions which treat the informal credit market as if it were an undifferentiated whole may be missing their mark.

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