Showing papers on "Collateral published in 1992"

Asymmetric information in credit markets and its implications for macro-economics

Abstract: competition.' In Stiglitz-Weiss (1981, 1983), we developed a theory of credit rationing. We argued that banks might not increase the interest rate they charged even in the face of an excess demand for funds, for to do so might reduce their expected rate of return because the probability of default would increase. Two reasons were presented for the possible inverse relationship between the rate of interest charged and the expected return to the bank: higher interest rates reduce the proportion of low risk borrowers (the sorting effect to which Smith had called attention) and higher interest rates induce borrowers to use riskier techniques (the incentive effect).2 We argued that collateral and other non-price rationing devices would not eliminate the possibility of credit rationing. Increasing collateral requirements makes borrowers less willing to take risks, which increases the return to the bank. On the other hand, increasing collateral requirements may adversely affect the mix of applicants.3 Even if all individuals had the same utility functions and faced the same investment opportunities, wealthier individuals would both be willing to put up more collateral and would undertake riskier projects than would less wealthy individuals if there was decreasing absolute risk aversion.4 Moreover, if large wealth accumulations are the result of risk-taking plus luck, a disproportionately large fraction of the very wealthy those who would put

Informal Finance In Low-income Countries

Abstract: Introduction, Dale W. Adams and Delbert A. Fitchert taking a fresh look at informal finance, D.W. Adams the rope and the box - group savings in The Gambia, Parker Shipton informal finance groups in Cameroon, Gertrud R. Schreider and Carlos E. Cuevas rural finance in Somalia, Virginia DeLancey informal finance in Niger - lessons for building form institutions, Douglas H. Graham informal finance in Sri Lanka, Nimal Sanderatne informal rural finance in Thailand, Tongroj Onchan informal finance in Papua New Guinea - an overview, Nimal Fernando informal finance in the Philippines footwear industry, Mario B. Lamberte collateral substituted in rural informal financial markets in the Philippines, Emmanuel F. Esquerra and Richard L. Meyer the Kou in Japan - a precursor of modern finance, Yoichi Izumida pawn-broking and small loans - cases from India and Sri Lanka, F.J.A. Bouman and R. Bastiaanssen strengths of informal financial institutions - examples from India, C.P.S. Nayar informal finance in Indonesia, F.J.A. Bouman and H.A.J. Moll evolving forms of informal finance in an Indonesian town, Otto Hospes linking formal and informal finance - an Indonesian example, Hans Dieter Seibel and Uben Parhusip the financial evolution of small businesses in Indonesia, Ross H. McLeod small-scale enterprise dynamics and the evolving role of informal finance, Carl Leidholm formal credit for informal borrowers - lessons from informal lenders, Robert P. Christen regulatory avoidance in informal financial markets, Robert C. Vogel and Robert Wieland contract lending to small farmers in the Dominican Republic, Jerry R. Ladman, et al rotating savings and credit associations in Bolivia, D.W. Adams and Marie L. Canavesi ROSCAs - state-of-the-art financial intermediation, J.D. Von Pischke what have we learned about informal finance in three decades?, U. Tun Wai where to from here in informal finance?, Dale W. Adams and P.B. Ghate.

Debts And Trespasses: Land, Mortgages, And The Ancestors In Western Kenya

Abstract: Agricultural programme planners have commonly assumed that, to adopt new crops and inputs, small-scale farmers need financial loans, and that private land titles help them to borrow by providing a form of collateral for mortgages. The experience of the over 2 million Luo people and others in Kenya shows how inappropriate this theory can be in a tropical African context. With a land-holding system based on patriliny, the hosting of in-laws, and other principles, Luo tend to live among kin. They continue to justify land claims largely by labour, by the presence of ancestral graves, and by the group membership these represent. These patterns persist despite individual titling by the government since the 1950s. Financial institutions trying to foreclose on defaulters, and buyers trying then to move on to those lands, face stiff social and political resistance, sometimes violent. The government land register obsolesces, and double-dealing proliferates. The mortgage system breaks down. Other problems in exogenous finance are legion. Credit means debt. It also means patronage, at international, national, or local levels. Neither public nor private financial institutions have overcome the great cultural, political, or pragmatic difficulties of lending to small farmers for staple food cropping or most other farm activities. These people have important debts and obligations of their own already, some quite subtle and some long-term. The promise of more loans, the most commonly cited justification for freehold tenure, proves largely illusory in western Kenya, as in many other rural parts of tropical Africa. Aid strategies based on saving and investment, and on non-financial intervention, hold more promise.

Interlinked Agrarian Markets in Rural India

Abstract: Foreword - C H Hanumantha Rao Introduction Salient Features of the Study Area and Credit Market Structure Small Farmers' Access to Formal Credit Characteristics of Linked and Non-Linked Households Theory and Evidence Credit Transactions, Lenders' Collateral Requirement and Interest Rates Interlinked Agrarian Credit Market The Case of Marginal and Small Tenants Landless Agricultural Labourers Their Interface with the Informal Credit Market Evaluation and Conclusion

Optimal financial contracts

Abstract: This paper investigates the structure of optimal financial contracts and the main factors that influence it--verification and monitoring costs, moral hazard, agents' wealth limitations, and their attitudes to risk. It suggests that the optimality of debt contracts with costly bankruptcy is more robust than some have recently suggested and discusses how recent literature is able to explain features of debt contracts such as coupon payments, covenant restrictions, the distinction between default and liquidation, maturity structure, collateral, and credit rationing. It also examines the optimality of equity and discusses circumstances where the optimal contract is neither debt nor equity. Copyright 1992 by Royal Economic Society.

Bank loan requirement and availability for Nigerian small farmers: a comparative analysis of experiences

Abstract: This study compares the size of bank loan requirement vis-a-vis its availability among Nigerian small farmers growing arable food crops, using Ondo State as a represen tative sample area. The state is a major food basket area for Nigeria, particularly the Southern parts. Various works which have been done on the need, inadequacy, appropriate sources of loan and the contributions of Nigerian banks to the overall national growth and develop ment of agriculture were reviewed. The study concentrated on small farmers and banks as units of analysis. The size of loan required by small farmers and the size of loan available to them without collateral security were determined via statistical tests. It was revealed that there is no significant difference between the size of loan required by small farmers growing arable food crops and the size of loan available to them in the banks. Consumptive loan was not included in the representative mean size of loan used for the test for reasons well documented in the paper. The role of extension services in motivating small farmers towards bank borrowing was found to be inadequate. Bank loan was found to be essential for the growth and development of the Nigerian small farmers in particular and the agricultural sector at large.

The Design of Bank Loan Contracts, Collateral, and Renegociation

Abstract: Empirical evidence suggests that banks playa unique role in the savings-investment process, affecting firms' cost of capital and the level of investment. We argue that bank uniqueness is related to how the design of bank loan contracts allows banks to affect borrowers' choice of project risk. Unlike corporate bonds, bank loans are typically secured senior debt which contain embedded options allowing the bank to "call" the loan. The option allows the bank tv control borrowers' risk-taking activity via renegotiation of the loan. We analyze the renegotiation outcomes and show that: (1) debt forgiveness occurs; (2) monitoring by the bank is not always successful in preventing the borrower from increasing risk; (3) renegotiated interest rates are not monotonic in borrower type; (4) inefficient liquidation can occur. In renegotiation seniority and collateral are crucial because they allow the bank to threaten the borrower and liquidate inefficient projects. We show that when a prepayment option is included in the bank loan contract, bank debt is more valuable (ex ante) to borrowing firms than corporate debt; it lowers the cost of capital.

Municipal Deposits: "Yes," "No," and "Maybe."

Abstract: Every four years the northern California city of Walnut Creek solicits bids for its banking services package. In the past, the city only did business with the state's major banking chains. Recently a community bank won the city's contract. Generally, $100 million-assets Bank of Walnut Creek doesn't pursue municipal banking relationships aggressively, according to James L. Ryan, president and CEO. But this time around, the bank saw an opportunity to make some money on the wide package of services the city wanted. In some cases, the bank determined it could meet city needs with its own facilities. For other needs, such as trust service and high-volume coin processing, it found the best route was subcontracting the service to other providers. In exchange, the city has guaranteed that it will maintain noninterest-bearing deposits sufficient to pay for services provided. Computer software that enables the bank to calculate what it costs to provide the package of services versus what value the transaction accounts provide to the bank is a critical element. "Without a detailed analysis program," says Leland Wines, senior vice-president and cashier, "you could lose your shirt." Interest-bearing deposits are another matter. The city handles those more like investments and the bank must bid for them along with other institutions. Wines says the bank determines its bid prices for the large CDs by consulting an on-line database of bank and thrift rates accessed through a personal computer and modem. "We just have to pay the highest rate" when the bank wants the funds, says Wines. "There's no loyalty." A good deal? Municipal banking relationships can be beneficial for some community banks, but a pain in the neck for others. As indicated above, term money is short-term and considered "hot funds" that will move the next time around if someone else is offering better rates. In mid-January, Richard Garay, treasurer of Ann Arbor, Mich., noted that many of the banks that solicit him for CD business weren't paying particularly good rates. He said that two offers had arrived that day-one promising a 3.7% return and the other 4.5%. The latter institution "wants the money more than the guy who offered me 3.7%," says Garay, but he doesn't consider either offer very aggressive. (Garay is chairman of the Cash Management, Banking, and Receipt-ing Committee of the Municipal Treasurers Association of the United States and Canada.) Like other banks experiencing low loan demand, Lincoln, Neb.'s Vistar Bank isn't soliciting municipal term funds at all, according to James F. Nissen, chairman and CEO. While the bank has sought municipal deposits from time to time, he adds, it only does so when it can match the short-term money to investments of similar maturity. Although municipal deposits may be useful for some banks, all the other business that comes with the municipal relationship can stretch a smaller bank's resources. As an example of the potential hassle, David W. Langley, chairman and CEO of $18 million-assets National Bank of Tukwila, Wash., notes that municipalities often bring in an abundance of coin. While his bank would like to bid for municipal relationships in his area-situated between Seattle and Tacoma-he finds his bank stands to gain more from pursuing small business customers. Of small banks in other areas that do win such bidding, he says he hears "they're kind of sorry they got the bids." Costly deposits. During an era of rising deposit insurance premiums, the desirability of building up municipal deposits has to be reexamined. Most states require banks accepting the funds to pledge securities from their investment portfolios as collateral for the deposits. The percentage of the deposit amount that must be covered varies from state to state, ranging from a low of 3% to more than 100%. Add to this the cost of deposit insurance and the bank may not want to bother with the business, depending on its situation and alternatives. …

Determinants of minority business formation: a detailed industry analysis

Abstract: An attempt is made to identify the major determinants of the formation rate of minority-owned businesses. By means of the ordinary least-squares method the study shows that the major determinants of minority business formation are both market and supply related. The market variables are city size which must be at least 100 000 people, household income and the regional unemployment rate. The most important supply variable appears to be household income. Although home equity can be a strong determinant of business formation, few of the businesses formed between 1970 and 1982 used it, probably because their owners will need to persuade commercial banks to accept their home equity as collateral for such loans. It is the author's belief that the potential use of home equity can be neutralized by the unwillingness of commercial banks to finance minority business formation. Since the commercial banks have been lending very little, much more capital will have to come from personal savings to bring about more mino...