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Efficacy of collateral types used by financial intermediaries in KwaZulu-Natal

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  • Kuhn, M.E.
  • Darroch, Mark A.G.
  • Ortmann, Gerald F.

Abstract

Collateral is an important incentive device used by lenders to encourage loan repayment. However, collateral must have secure and transferable title, it must be marketable, have low lender liquidation costs and lenders must be able to attach the collateral. Study results for rural and micro-enterprise finance institutions in KwaZulu-Natal showed that assets such as vehicles and equipment were not effective as collateral due to high costs in attaching the asset. Cessions on crops were often constrained by flaws in collection mechanisms. Secure and transferable property rights were important preconditions for land to have value as collateral. Collateral substitutes such as joint liability mechanisms were less effective when lending to large farmer groups (30-60 members) compared with small groups (4-6 individuals) of micro-entrepreneurs operating in urban areas.

Suggested Citation

  • Kuhn, M.E. & Darroch, Mark A.G. & Ortmann, Gerald F., 1997. "Efficacy of collateral types used by financial intermediaries in KwaZulu-Natal," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 36(4), pages 1-13, December.
    • Handle: RePEc:ags:agreko:54724
    DOI: 10.22004/ag.econ.54724
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    References listed on IDEAS

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    1. Feder, Gershon & Onchan, Tongroj & Raparla, Tejaswi, 1988. "Collateral, guaranties and rural credit in developing countries: evidence from Asia," Agricultural Economics, Blackwell, vol. 2(3), pages 231-245, November.
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    3. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
    4. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-689, October.
    5. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
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    Cited by:

    1. Ortmann, Gerald F., 2000. "Promoting competitiveness in South African agriculture and agribusiness: The role of institutions," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 39(4), pages 1-33, March.

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