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Informal loans in Russia: credit rationing or borrower’s choice?

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  • Maria Semenova

    ()
    (National Research University Higher School of Economics. Center for Institutional Studies)

  • Victoria Rodina

    ()
    (National Research University Higher School of Economics. Center for Institutional Studies)

Abstract

This paper examines the strategies of Russian households for choosing either the formal or informal banking sector as a source of credit. We aim to learn why households refuse to become clients of a bank and prefer to instead raise funds by borrowing from individuals – friends, colleagues, relatives, and other private parties. We use the results of “Monitoring the Financial Behavior of the Population” (2009-2010), a national survey of Russian households. Our results suggest that a household’s choice of the informal credit market is based not only on economic factors, but also on some institutional ones, including financial literacy, trust in the banking sector, and credit discipline. We show that choosing the informal market is explained by a lack of financial literacy, measured by mathematical competence and home accounting, as well as by a lack of trust in the banking sector as a whole. Borrowers from private parties demonstrate a higher degree of credit discipline: those who believe that repaying a loan is not obligatory are less frequently among informal borrowers and they choose the bank credit market. Our findings, however, are still in line with credit rationing theory. We show that better financial conditions reduce a household’s probability to use both formal and informal credit markets in favor of pure bank borrowing

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Bibliographic Info

Paper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 14/FE/2013.

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Length: 31 pages
Date of creation: 2013
Date of revision:
Publication status: Published in WP BRP Series: Financial Economics / FE, June 2013, pages 1-31
Handle: RePEc:hig:wpaper:14/fe/2013

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Keywords: household; consumer loans; informal loans; Russia;

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  1. Leora F. Klapper & Annamaria Lusardi & Georgios A. Panos, 2012. "Financial Literacy and the Financial Crisis," NBER Working Papers 17930, National Bureau of Economic Research, Inc.
  2. Silvia Magri, 2002. "Italian households' debt: determinants of demand and supply," Temi di discussione (Economic working papers) 454, Bank of Italy, Economic Research and International Relations Area.
  3. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2007. "Reaching out: Access to and use of banking services across countries," Journal of Financial Economics, Elsevier, vol. 85(1), pages 234-266, July.
  4. Zeller, Manfred, 1994. "Determinants of credit rationing: A study of informal lenders and formal credit groups in Madagascar," World Development, Elsevier, vol. 22(12), pages 1895-1907, December.
  5. Semenova, Maria, 2011. "Save or borrow – what determines Russian households’ financial strategies?," BOFIT Discussion Papers 28/2011, Bank of Finland, Institute for Economies in Transition.
  6. Thorsten Beck & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2004. "Bank competition and access to finance: international evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 627-654.
  7. D. Strebkov, 2005. "Household Borrowing Behavior in Russia," Problems of Economic Transition, M.E. Sharpe, Inc., vol. 48(5), pages 22-48, September.
  8. Silvia Magri & Raffaella Pico & Cristiana Rampazzi, 2011. "Which households use consumer credit in Europe?," Questioni di Economia e Finanza (Occasional Papers) 100, Bank of Italy, Economic Research and International Relations Area.
  9. Lee, Samuel & Persson, Petra, 2012. "Financing from Family and Friends," Working Paper Series 933, Research Institute of Industrial Economics.
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