Incentive Mechanisms, Loan Decisions and Credit Rationing: A Framed Field Experiment on China's Responsibility System for Rural Credit

Cao, Jessica; Turvey, Calum G.; Ma, Jun; Kong, Rong; He, Guangwen; Yan, Jubo

doi:10.2139/ssrn.2356113

Cited by 5 publications

(4 citation statements)

References 39 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Given the reformation of agricultural credit policies in China in the 21st century, it is important to understand the drivers of credit demand and any informational and/or institutional gaps between lenders and borrowers (Kong et al, 2014;Turvey et al, 2014;Cao et al, 2016). By and large, the literature related to agricultural finance in China mostly investigates the characteristics of the borrower with surprisingly few examining agricultural credit as a consumer product characterized by a bundle of attributes of varying importance to farmer-borrowers.…”

Section: Introductionmentioning

confidence: 99%

Heterogeneous choice in the demand for agriculture credit in China: results from an in-the-field choice experiment

Kong

Peng

Meng

et al. 2020

CAER

Self Cite

View full text Add to dashboard Cite

PurposeIn this study, the authors examined demand-side credit in rural China with the aims of understanding attribute preferences and the willingness of farmers to pay for credit.Design/methodology/approachThe authors implemented an in-the-field discrete choice experiment (DCE) using a D-optimal block (6 × 9 × 3) design applied to 420 farm households across five Chinese provinces (Shandong, Sichuan, Shaanxi, Jiangsu and Henan) in the summer and fall of 2018. The DCE included six attributes including the interest rate, term of loan, type of loan, type of repayment, type of institution and mobile banking services.FindingsConditional and mixed logit results indicated a downward sloping credit demand curve with variable elasticity across regions. Provincial willingness-to-pay (WTP) indicators suggested that farmers were willing to pay a premium for long-term ( 0.03–0.687%) and low collateral credit loans ( 0.79–2.93%). Also, four of five provinces indicated a preference for loan amortization rather than lump-sum payment. Interestingly, in comparison to the Agricultural Bank of China (ABC), only farmers in Shandong, Sichuan and Shaanxi indicated a preference for rural credit cooperatives (RCCs)/banks and the Postal Savings Bank of China (PSBC). Another quite surprising result was bank services, in our case, access to mobile banking did not appear to induce WTP for agricultural credit. While conditional and mixed logit regression coefficients were similar (and therefore robust), the authors found that there was substantial heterogeneity across attribute preferences on term of loan, type of loan and amortization. Preferences for type of lender and mobile banking were generally homogenous. This result alone suggested that lenders should consider offering a suite of credit products with different attributes in order to maximize the potential pool of borrowers. While there were some differences across provinces, farmers appeared to be indifferent to lenders, and it did not appear that offering banking services such as mobile banking had any bearing on credit decisions.Research limitations/implicationsThis paper presents a first step in using in-the-field choice experiments to better understand rural finance in China. Although the sample size satisfies conventional levels of significance and rank conditions, the authors caution against attributing results to China as a whole. Different provinces have different institutional structures and agricultural growing conditions and economies and these effects may differentially affect WTP for credit. Although by all indications farmers were aware of credit, not all farmers, in fact a minority, actually borrowed from a financial institution. This is not unusual in China, but for these farmers, the DCE was posed as hypothetical. Likewise, the study’s design was based on a generic credit product typical of rural China, and the authors caution against making inferences about other products with different attributes and risk structures.Social implicationsThis study is motivated by the rapidly changing dynamic in China's agricultural economy. With specific reference to new laws and regulations about the transfer of land use rights (LURs), China's agricultural economy is undergoing significant and rapid change which will require better understanding by policy makers, lenders and practitioners of the changing credit needs of farmers, including the new and emerging class of commercial farmers.Originality/valueTo the best of the authors’ knowledge, the authors believe that the result provided in this paper present the first use of in-the-field DCE and are the first to be reported in either the English or Chinese literature on rural credit product design.

show abstract

Section: Introductionmentioning

confidence: 99%

Heterogeneous choice in the demand for agriculture credit in China: results from an in-the-field choice experiment

Kong

Peng

Meng

et al. 2020

CAER

Self Cite

View full text Add to dashboard Cite

show abstract

“…The majority of the poor live in rural areas and largely depend on agriculture, specifically subsistence farming. For this reason, access to credit is thought to reduce poverty, because farmers are expected to employ the acquired microcredit in income-creating investments, such as the purchase of productivity-increasing inputs (Feder et al , 1990; Cao et al , 2016). Zeller et al (1997) argue, however, that providing microcredit targeted to production alone is a futile exercise because resources at the household level are fungible.…”

Section: Introductionmentioning

confidence: 99%

Poverty alleviation through microcredit in Sub-Saharan Africa revisited

Buchenrieder

Gnilachi

Benjamin

2019

AFR

View full text Add to dashboard Cite

Purpose The purpose of this paper is to analyze the impact of microcredit on per capita income of farm households in Cameroon. It discusses short- and long-term implications of access to microcredit on income poverty. Design/methodology/approach The authors interviewed rural households with agriculture being either their first or second income-creating activity. All sampled households are clients of a Cameroonian village bank. The authors used a balanced panel with a treatment and a control group, the latter not having had a village bank microcredit yet. The results were reaffirmed using bootstrapping. Findings This paper argues that microcredit has had a significant positive impact on per capita income in the short run, but the long-term effect was negative, albeit not significant. In the long run, absolute income poverty had further decreased in the treatment group, however, not as much as in the control group. Because the treatment group had been shifting back to the informal financial sector and had diverted part of the microcredit for consumption, this may have led to lower marginal income effects. Productivity of credit financed inputs by the treatment group remained constant, which also explains why the treatment group fell back over time. Research limitations/implications The balanced panel data set was relatively small due to attrition over time. This was accounted for using bootstrapping. Nevertheless, research results must be interpreted with care. Furthermore, the discussion is not exhaustive. Practical implications Despite tremendous methodological advancements regarding the impact analysis of microcredit on income poverty, findings remain controversial and inconsistent. Frequently, fungibility is a confounding issue. Microcredit policy ought to consider more long-term effects. Originality/value There is much discourse amongst development economists about the impact of microcredit on poverty. Research based on panel data may clarify some of the controversial issues. This research paper uses a rather unique panel data set from Cameroonian farm households that are clients of a private sector village bank. The issue of sample size limitation is dealt with using bootstrapping. The authors base the empirical analysis on a comprehensive and theoretically founded economic farm household model.

show abstract

“…From an experimental study with experienced commercial bank loan officers in India, Cole, Kanz, and Klapper (2015) find that incentive schemes that penalize officers for extending loans that become delinquent induce them to invest more effort in screening and make more profitable lending decisions, but by sanctioning significantly fewer loans. 5 Similarly, in the Chinese context, Cao et al (2011) make use of an experimental design in which loan officers from rural Credit Cooperatives in Shandong were recruited to make lending decisions on randomly assigned loan files that had been previously evaluated. As in the Cole et al experiment in India, the performance and repayment histories on the approved loans were already known.…”

Section: Introductionmentioning

confidence: 99%

Commercialization and mission drift: Evidence from a large Chinese microfinance institution

Jia

Cull

Guo

et al. 2016

China Economic Review

View full text Add to dashboard Cite

Front-line loan officers of microfinance institutions (MFIs) are important in acquiring information on potential borrowers and selecting them in accordance with the MFI's mission. We use a unique data set on loan officers and their loan portfolios from China's largest NGO microfinance institution to test whether officers' personal characteristics affect the size and quality of their loans. We study a period in which the institution shifted from reliance on government donations and subsidies to commercial sources of funding. Imposing more commercial incentives on loan officers could affect how they balance potentially competing objectives to serve the poor and pursue profitability. We find that loan officers who were formerly farmers or worked in local government were better able to maintain lending to poorer borrowers, without incurring substantially lower repayment rates on their loans. In short, it appears that the career backgrounds of loan officers did play a role in preventing mission drift.

show abstract

Incentive Mechanisms, Loan Decisions and Credit Rationing: A Framed Field Experiment on China's Responsibility System for Rural Credit

Cited by 5 publications

References 39 publications

Heterogeneous choice in the demand for agriculture credit in China: results from an in-the-field choice experiment

Heterogeneous choice in the demand for agriculture credit in China: results from an in-the-field choice experiment

Poverty alleviation through microcredit in Sub-Saharan Africa revisited

Commercialization and mission drift: Evidence from a large Chinese microfinance institution

Contact Info

Product

Resources

About