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

  • Paul Dower

    ()

    (New Economic School and the Center for Economic and Financial Research)

  • Elizabeth Potamites

Many land titling programs have produced lackluster results in terms of achieving access to credit for the poor. This may re ect insucient empha- sis on local banking practices. Bankers commonly use sophisticated methods other than collateral to ensure repayment. Some methods rely on ex-ante in- formation ows and formal land titles can improve these ows by signaling to the bank important characteristics about borrowers. Using a household survey from Indonesia, we provide evidence that formal land titles do have a positive and significant e ect on access to credit and at least part of this effect is best interpreted as an improvement in ex-ante information ows. This result stands in contrast to the prevailing notion that land titles only function as collateral. Analysts who neglect local banking practices may misinterpret the observed effect of systematic land titling programs on credit access because these programs tend to dampen the signaling value of formal land titles.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0155.

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Length: 54 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:cfr:cefirw:w0155
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  1. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  2. Carter, Michael R. & Olinto, Pedro, 2000. "Getting Institutions 'Right' for Whom: Credit Constraints and the Impact of Property Rights on the Quantity and Compostiton of Investment," Staff Paper Series 433, University of Wisconsin, Agricultural and Applied Economics.
  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. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  5. Sebastian Galiani & Ernesto Schargrodsky, 2005. "Property Rights for the Poor: Effects of Land Titling," Business School Working Papers proprightspoor, Universidad Torcuato Di Tella.
  6. Jean O. Lanjouw & Philip I. Levy, 1998. "Untitled: A Study of Formal and Informal Property Rights in Urban Ecuador," Working Papers 788, Economic Growth Center, Yale University.
  7. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  8. 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.
  9. 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.
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