Dependence of Informal Interest Rates and Level of Lenders’ Influence in the Informal Loan Market in Thailand

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Abstract

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.

Keywords

Informal interest rates Level of lenders’ influence Informal loan 

JEL Classification

E40 

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Copyright information

© International Atlantic Economic Society 2018

Authors and Affiliations

  1. 1.Department of EconomicsChulalongkorn UniversityBangkokThailand

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