Informal loans in Russia: credit rationing or borrower’s choice?
AbstractThis 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 InfoPaper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 14/FE/2013.
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
household; consumer loans; informal loans; Russia;
Find related papers by JEL classification:
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- P2 - Economic Systems - - Socialist Systems and Transition Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-06 (All new papers)
- NEP-BAN-2013-12-06 (Banking)
- NEP-CIS-2013-12-06 (Confederation of Independent States)
- NEP-IUE-2013-12-06 (Informal & Underground Economics)
- NEP-SOC-2013-12-06 (Social Norms & Social Capital)
- NEP-TRA-2013-12-06 (Transition Economics)
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