Signaling Credit-Worthiness: Land Titles, Banking Practices and Formal Credit in Indonesia
Many land titling programs have produced lackluster results in terms of achieving access to credit for the poor. This may re ect insufficient emphasis on local banking practices. Bankers commonly use methods other than collateral to ensure repayment, such as targeting borrower characteristics that, on average, improve repayment rates. Formal land titles can signal to the bank these important characteristics. Using a household survey from Indonesia, we provide evidence that formal land titles do have a positive and significant effect on access to credit and at least part of this effect is best interpreted as an improvement in 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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