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Signaling Credit-Worthiness: Land Titles, Banking Practices and Access to Formal Credit in Indonesia

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  • Dower, Paul
  • Potamites, Elizabeth

Abstract

It is often suggested that the poor are credit-rationed due to their lack of formal collateral. Using a household survey from Indonesia, we estimate the impact of having a land title on formal credit access. Adopting an instrumental variable approach, we find that having a formal title significantly increases a household's probability of ever having had a formal loan and the observed loan amount. Why land titles increase access to credit is still not clear. Incorporating data from a unique survey of bankers in Indonesia, we will argue that possessing a formal title increases a household's incidences of formal credit not because the value of the title as collateral but because of what possessing a title signals about the household to the banker. We apply a simple model of contract choice to show how title can act as an indirect signal.

Suggested Citation

  • Dower, Paul & Potamites, Elizabeth, 2005. "Signaling Credit-Worthiness: Land Titles, Banking Practices and Access to Formal Credit in Indonesia," 2005 Annual meeting, July 24-27, Providence, RI 19120, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea05:19120
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    References listed on IDEAS

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    1. Quy-Toan Do & Lakshmi Iyer, 2008. "Land Titling and Rural Transition in Vietnam," Economic Development and Cultural Change, University of Chicago Press, vol. 56, pages 531-579.
    2. Boucher, Stephen R. & Guirkinger, Catherine & Trivelli, Carolina, 2005. "Direct elicitation of credit constraints: Conceptual and practical issues with an empirical application," 2005 Annual meeting, July 24-27, Providence, RI 19272, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Kochar, Anjini, 1997. "An empirical investigation of rationing constraints in rural credit markets in India," Journal of Development Economics, Elsevier, vol. 53(2), pages 339-371, August.
    4. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
    5. Michael R. Carter & Pedro Olinto, 2003. "Getting Institutions “Right” for Whom? Credit Constraints and the Impact of Property Rights on the Quantity and Composition of Investment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(1), pages 173-186.
    6. Frank Place & S. E. Migot-Adholla, 1998. "The Economic Effects of Land Registration on Smallholder Farms in Kenya: Evidence from Nyeri and Kakamega Districts," Land Economics, University of Wisconsin Press, vol. 74(3), pages 360-373.
    7. Galiani, Sebastian & Schargrodsky, Ernesto, 2010. "Property rights for the poor: Effects of land titling," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 700-729, October.
    8. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
    9. Jean O. Lanjouw & Philip I. Levy, 2002. "Untitled: A Study of Formal and Informal Property Rights in Urban Ecuador," Economic Journal, Royal Economic Society, vol. 112(482), pages 986-1019, October.
    10. 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.
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    Citations

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    Cited by:

    1. Deininger, Klaus, 2010. "Towards sustainable systems of land administration: Recent evidence and challenges for Africa," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 5(1), September.
    2. Daniel Domeher & Raymond Abdulai, 2012. "Land registration, credit and agricultural investment in Africa," Agricultural Finance Review, Emerald Group Publishing, vol. 72(1), pages 87-103, March.
    3. repec:eme:rleczz:s0147-912120140000040007 is not listed on IDEAS
    4. Mauricio Moura & Rodrigo Bueno, 2014. "The Effect of Land Title on Child Labor Supply: Empirical Evidence from Brazil," Research in Labor Economics,in: Factors Affecting Worker Well-being: The Impact of Change in the Labor Market, volume 40, pages 195-222 Emerald Publishing Ltd.
    5. Daniel Domeher & Raymond T., Abdulai, 2012. "Land registration and access to SME credit: preliminary findings," ERES eres2012_002, European Real Estate Society (ERES).
    6. repec:taf:jpropr:v:33:y:2016:i:2:p:162-188 is not listed on IDEAS
    7. Misha Saleem, 2011. "The Effect of Ownership Rights on Urban Households' Access to Credit in Lahore," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(2), pages 111-139, Jul-Dec.
    8. William Easterly, 2009. "Can the West Save Africa?," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 373-447, June.
    9. Daniel Domeher, 2012. "Land rights and SME credit: evidence from Ghana," International Journal of Development Issues, Emerald Group Publishing, vol. 11(2), pages 129-143, June.
    10. Caio Piza & Mauricio José Serpa Barros de Moura, 2011. "How Does Land Title Affect Access to Credit? Empirical Evidence from an Emerging Economy," Working Paper Series 2211, Department of Economics, University of Sussex.
    11. Shapiro, D.A., 2015. "Microfinance and dynamic incentives," Journal of Development Economics, Elsevier, vol. 115(C), pages 73-84.

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    Keywords

    Land Economics/Use;

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