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Credit Choices in Rural Egypt: A Comparative Study of Formal and Informal Borrowing

Author

Listed:
  • Sarah Mansour

    (Faculty of Economics and Political Science, Cairo University, Giza 12613, Egypt)

  • Nagwa Samak

    (Faculty of Economics and Political Science, Cairo University, Giza 12613, Egypt
    Faculty of Administrative Science, Galala University, Suez 43511, Egypt)

  • Nesma Gad

    (Faculty of Economics and Political Science, Cairo University, Giza 12613, Egypt)

Abstract

Access to finance is essential for fostering financial inclusion, improving household economic well-being, and stimulating economic growth. However, if not prudently managed, it can become a double-edged sword, increasing the risk of over-indebtedness, particularly among low-income households. This paper investigates the borrowing behavior of rural households in Egypt, exploring whether it is motivated by the optimization of intertemporal consumption or reflects deeper financial vulnerabilities. The study enhances our understanding of rural households’ financial behavior in Egypt and contributes to the literature by introducing perceived general self-efficacy as a key behavioral factor. The paper employs a quantitative methodology using a probit analysis of the Egypt Labor Market Panel Survey to explore the factors affecting the demand for formal loans, informal borrowing, and Rotating Saving and Credit Associations (RoSCAs). The results show that informal credit plays a dominant role in meeting rural households’ financial needs. A significant positive relationship between formal and informal credit suggests they are complementary. Elderly, married, less educated, and poorer individuals are more likely to seek both forms of credit, with employment stability being a key differentiator. Self-efficacy also has a significant positive effect. No significant regional differences are observed, except in the case of informal borrowing, with rural households in Upper Egypt showing less reliance, suggesting that social image may influence financial behavior in this region. The results suggest that demand for credit is driven by economic and financial vulnerability of rural households. The paper highlights key policy implications. First, to enhance participation in formal credit market, credit policies should offer more affordable, tailored credit relevant to starting a business rather than financing consumption, part of which is conspicuous. Second, the low self-efficacy among the rural poor suggests a need for policies that combine credit access with financial literacy and debt management support to prevent over-indebtedness.

Suggested Citation

  • Sarah Mansour & Nagwa Samak & Nesma Gad, 2024. "Credit Choices in Rural Egypt: A Comparative Study of Formal and Informal Borrowing," JRFM, MDPI, vol. 17(11), pages 1-36, October.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:11:p:487-:d:1509381
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    References listed on IDEAS

    as
    1. Mohieldin, Mahmoud S & Wright, Peter W, 2000. "Formal and Informal Credit Markets in Egypt," Economic Development and Cultural Change, University of Chicago Press, vol. 48(3), pages 657-670, April.
    2. Tang, Ning, 2021. "Cognitive abilities, self-efficacy, and financial behavior," Journal of Economic Psychology, Elsevier, vol. 87(C).
    3. Ke Chen & Miss Mali Chivakul, 2008. "What Drives Household Borrowing and Credit Constraints? Evidence from Bosnia and Herzegovina," IMF Working Papers 2008/202, International Monetary Fund.
    4. Kwan Ok Lee & Masaki Mori, 2021. "Conspicuous consumption and household indebtedness," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 557-586, September.
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