Dependence of Informal Interest Rates and Level of Lenders’ Influence in the Informal Loan Market in Thailand
- 6 Downloads
Informal finance with usurious interest rates seems to be the last resort for the poor in many developing countries. In Thailand, informal credit lenders can freely set up extortionate interest rates and use controversial enforcement actions to pressure borrowers to repay loans, because that legal enforcement is not practical due to the low punishment levels for those lenders. Despite widespread interest in the determinants of the informal interest rates, it remains a largely unexplored area. This study investigates whether level of lenders’ influence over the borrower, and some characteristics of the borrowers, are related to informal interest rates, enabling the rates to be classified into particular categories. Ordered logistic regression is used to analyze the data. The investigation was based on information collected in a survey presented to a sampled population of 694 participants from Bangkok, Nonthaburi, Phathum Thani, and Samut Prakan where the number of informal loans during the last seven years is highest when compared to other regions of the country. The results suggest that the level of lenders’ influence over the borrower in order to obtain a loan correlates with the informal interest rates applied. Moreover, some characteristics of a borrower, i.e., debt-to-income ratio and high level of familiarity between an informal lender and a borrower, also significantly affect the rates.
KeywordsInformal interest rates Level of lenders’ influence Informal loan
- Bangkok Post (2017a). Extortionists in uniform ‘were also loan sharks’. https://www.bangkokpost.com/archive/gangsters-in-uniform/1304979. Accessed Aug 2017.
- Bangkok Post (2017b). Nano and picofinance schemes bearing fruit. https://www.bangkokpost.com/archive/nano-and-picofinance-schemes-bearing-fruit/1301355. Accessed Aug 2017.
- Bank of Ayudhya (2017). Personal loan. https://www.krungsri.com/bank/th/PersonalBanking/. Accessed Nov 2017.
- Bhattacharjee, M., & Rajeev, M. (2010). Interest rate formation in informal credit markets in India: Does level of development matter?. BWPI Working Paper 126. http://hummedia.manchester.ac.uk/institutes/gdi/publications/workingpapers/bwpi/bwpi-wp-12610.pdf.
- Finmark Trust (2017). FinScope Consumer Survey. https://www.finmark.org.za/finscope/. Accessed Nov 2017.
- Finnegan, G., & Singh, A. (2004). Role of the informal sector in coping with economic crisis in Thailand and Zambia. SEED Working Paper 42. http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/documents/publication/wcms_093979.pdf.
- Gestel, T. V., & Baesens, B. (2008). Credit risk management: basic concepts: financial risk components, rating analysis, models, economic and regulatory capital. New York: Oxford University Press.Google Scholar
- Haugen, N. (2005). The informal credit market: a study of default and informal lending in Nepal. Department of Economics, University of Bergen. Available at: https://www.cmi.no/publications/1937-the-informal-credit-market. Accessed Oct 2016.
- Hoff, K., Braverman, A., & Stiglitz, J. E. (1993). The economics of rural organization: theory, practice, and policy. New York: Oxford University Press.Google Scholar
- Interest Rate Control Act, B.E. 2560 (2017). Retrieved from http://www.jla.coj.go.th/doc/data/jla_1499754063.pdf. Accessed Feb 2016.
- Jeromi, P. D. (2007). Regulation of informal financial institutions: a study of money lenders in Kerala. Reserve Bank of India Occasional Papers, 28(1), 1–32.Google Scholar
- Kedir, A. (2003). Determinants of access to credit and loan amount: Household-level evidence from urban Ethiopia. Presented at International Conference on Development Studies in Ethiopia, http://scholarworks.wmich.edu/africancenter_icad_archive/64/.
- National Statistical Office of Thailand (NSO) (2016). The household socio-economic survey whole kingdom. http://web.nso.go.th/en/survey/house_seco/household_main.htm. Accessed Sept 2016.
- Onchan, T. (1985). Informal credit and the development of non-farm enterprises in Thailand. Research paper prepared for USAID. http://pdf.usaid.gov/pdf_docs/PNAAW477.pdf.
- Orso, C. E. (2009). Formal and informal sectors: interactions between moneylenders and traditional banks in the rural Indian credit market. POLIS Working papers 151. http://polis.unipmn.it/pubbl/RePEc/uca/ucapdv/orso151.pdf.
- Robert, H., Pochanukul, P., & Achavanuntakul, S. (2013). Qualitative demand-side research report. Asian Development Bank. Available at: https://www.adb.org/sites/default/files/project-document/80380/45128-001-tacr-06.pdf. Accessed Oct 2016.
- Sondergaard, L. M., Luo, X., Jithitikulchai, T., Poqqi, C., Lathapipat, D., Smita, K., … Arin, T. (2016). Thailand-systematic country diagnostic: getting back on track-reviving growth and securing prosperity for all. World Bank Group, Washington, D.C. Retrieved November 2017, http://documents.worldbank.org/curated/en/855161479736248522/Thailand-Systematic-country-diagnostic-getting-back-on-track-reviving-growth-and-securing-prosperity-for-all.
- StataCorp. (2011). Stata Statistical Software: Release 12. College Station: StataCorp LP.Google Scholar
- Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American Economic Review, 71(3), 393–410.Google Scholar
- The Nation (2016). Nationwide crackdown on Thailand’s largest loan shark gang. http://annx.asianews.network/content/nationwide-crackdown-thailand%E2%80%99s-largest-loan-shark-gang-35870. Accessed Dec 2016.
- The Siam Commercial Bank (2017). Speedy loan. http://www.scb.co.th/th/personal-banking/loans/personal-loans/speedy-loan. Accessed Nov 2017.
- The University of the Thai Chamber of Commerce (2016). Retrieved from http://www.utcc.ac.th/index.php/en/news/prnews_detail/6071. Accessed Sept 2016.
- Yotopoulos, P. A., & Floro, S. L. (1992). Income distribution, transaction costs and market fragmentation in informal credit markets. Cambridge Journal of Economics, 16(3), 303–326.Google Scholar