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Knowledge, Information, and Financial Decisions: Why Do People Choose to Finance from Informal Credit Markets?

In: Financial Decisions of Households and Financial Inclusion: Evidence for Latin America and the Caribbean

Author

Listed:
  • Harold Vásquez

    (Instituto Tecnológico de Santo Domingo)

  • María del Mar Castaños

    () (Ponticifia Universidad Católica Madre y Maestra)

Abstract

Informal credit markets constitute an important and expensive source of household financing, especially in developing countries. In this paper, we assess how a lack of financial information and financial knowledge affect the probability that an individual will obtain credit from an informal source. We also identify some of the main factors that determine households’ financial decisions. Specifically, we use a multinomial logit framework to test how individuals’ knowledge and ability to solve basic financial problems affect their selection among formal and informal credit options. Our findings suggest that financial literacy affects financial behavior, increasing the probability of acquiring informal credit. Low income and the lack of commercial relations with banks have the same effect on households’ financial behavior.

Suggested Citation

  • Harold Vásquez & María del Mar Castaños, 2018. "Knowledge, Information, and Financial Decisions: Why Do People Choose to Finance from Informal Credit Markets?," Investigación Conjunta-Joint Research,in: María José Roa García & Diana Mejía (ed.), Financial Decisions of Households and Financial Inclusion: Evidence for Latin America and the Caribbean, edition 1, chapter 9, pages 279-308 Centro de Estudios Monetarios Latinoamericanos, CEMLA.
  • Handle: RePEc:cml:incocp:7en-09
    Note: Joint Research Program of the Central Bank Researchers Network
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    References listed on IDEAS

    as
    1. Madestam, Andreas, 2014. "Informal finance: A theory of moneylenders," Journal of Development Economics, Elsevier, vol. 107(C), pages 157-174.
    2. Batini, Nicoletta & Levine, Paul & Lotti, Emanuela & Yang, Bo, 2011. "Monetary and Fiscal Policy in the Presence of Informal Labour Markets," Working Papers 11/97, National Institute of Public Finance and Policy.
    3. Nicoletta Batini & Young-Bae Kim & Paul Levine & Emanuela Lotti, 2009. "Informal Labour and Credit Markets: A Survey," School of Economics Discussion Papers 0609, School of Economics, University of Surrey.
    4. Atieno, Rosemary, 2009. "Linkages, Access to Finance and the Performance of Small-Scale Enterprises in Kenya," WIDER Working Paper Series 006, World Institute for Development Economic Research (UNU-WIDER).
    5. Yuan, Yan & Xu, Lihe, 2015. "Are poor able to access the informal credit market? Evidence from rural households in China," China Economic Review, Elsevier, vol. 33(C), pages 232-246.
    6. Santos, Paulo & Barrett, Christopher B., 2011. "Persistent poverty and informal credit," Journal of Development Economics, Elsevier, vol. 96(2), pages 337-347, November.
    7. Bell, Clive, 1990. "Interactions between Institutional and Informal Credit Agencies in Rural India," World Bank Economic Review, World Bank Group, vol. 4(3), pages 297-327, September.
    8. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    personal finance; informal credit; multinomial logit; financial frictions.;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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