'Re-ravelling' the credit market in urban Tanzania: are property rights the answer to credit market failure?

RESEARCH QUESTION

Recent experimental studies on microcredit have begun to reveal its mechanisms and limitations.  In particular, Banerjee, Duflo, Glennerster and Kinnan (2009) provide evidence that any positive impacts of microcredit are concentrated among those with the potential to start a microenterprise, but who would not be able to do so in the absence of credit.  But introducing microcredit is not quite the same as solving the underlying causes of credit market failure, and therefore does not necessarily establish a sustainable market solution. The causes of credit market failure are typically understood of taking two forms: first, adverse selection and moral hazard problems that create a relative vacuum in the existing credit market; and second, contract enforcement problems, that limit the extension of credit for potentially profitable projects in the first place. Collateral may not resolve these market failures per se, but offers a mechanism for credit providers to screen, and not just on the basis of potential profitable projects. De Soto, for example, has long argued that large numbers of the poor, if offered titles for their land and houses, will start and expand microenterprises using this new opportunity to take up collateralised credit. However, in itself, collateral does not resolve adverse selection and moral hazard. There may also be important differences between men and women in access to collateral, linked to customary rights.

This leads to a number of important research questions: Does offering property rights to women and men lead to a rapid expansion of credit demand? How important are adverse selection and moral hazard considerations as constraints to the provision of credit to (potential) urban microentrepreneurs?  Can credit markets that have “unravelled” be rebuilt? Do specific programmes to offer titles to women affect credit demand differentially?

PROJECT

We propose to build on an existing study in progress in two sub-wards of Dar es Salaam, Tanzania.  This study is a randomised controlled trial that creates variation in access to formal property rights, called Certificates of Right of Occupancy (CRO), in a context where rights to land are largely informal, and possibly different for men and women.  This intervention is currently underway, funded by the International Growth Centre with further support by the World Bank Gender Trust Fund.  It will offer evidence on whether property rights will increase credit demand (possibly leading to a “de Soto” effect). Specific incentives were also randomly offered to include women on the titles, allowing us to study the gendered impacts of this intervention explicitly. In our proposed extension, we will study whether these property rights have improved the enforceability of contracts for women and men and whether moral hazard and adverse selection are relevant constraints. We propose a cross-cutting intervention that would subsidize interest rates for an individual-level, microcredit programme. Price (interest rate) variation and the resulting pool of applicants will give us information on the relevance of adverse selection and moral hazard. By cross-cutting rates of interest with collateral, the proposed design would shed light not only on the mechanisms underlying the unravelled credit market in the urban informal sector of Tanzania, but also the cost effectiveness of alternative mechanisms intended to address this problem. As incentives to add women where experimentally varied as well, we can study all these effects in the gendered way as well, offering further evidence on the potential benefits from specifically targeting women in offering titles. The iiG part will specifically focus on the credit market intervention, and its consequences for men and women.