Pretending to Be Poor: Borrowing to Escape Forced Solidarity in Cameroon

Abstract

From field observations of credit cooperatives in Cameroon, we find that 19% of the loans taken are fully collateralized by savings held in the same institutions. This behavior is costly to the borrower, as it represents a net interest payment of about 24% per year. While traditional explanations may partly explain this behavior, interviews with members of the cooperatives suggest the following new rationale: members resort to borrowing to signal to friends and relatives that they are poor and do not have savings available. By doing so, they can avoid requests for financial help. We develop a signaling model to analyze the conditions under which this behavior is an equilibrium outcome.

Individualism–collectivism, governance and economic development

“…Consistent with this, Platteau (2000) points out that the fact that redistributive norms are not applied to foreign entrepreneurs is one reason why they tend to do relatively well in the host countries. More recently, experimental evidence from a number of developing countries has provided support for the idea that individuals faced with kinship pressures to share their wealth, adopt evasive strategies such as "excessive borrowing" to signal that one is cash constrained (Baland et al 2011), or reductions in profitable but observable investment incomes to the possible detriment of economic growth (Jakiela and Ozier 2015). Gorodnichnko andRoland (2011a, 2013) have proposed that, from a theoretical perspective at least, the direct impact of individualism on long-run growth is ambiguous.…”

Risk Sharing and Internal Migration

“…First, they could engage in the strategic hiding of income and assets. An excellent example of this is Baland, Guirkinger, and Mali (2011), who show how people take out costly loans in order to conceal their income. Second, religious conversion is one strategy which could serve as a respectable way to distance oneself from some of the traditional obligations and to be, instead, subject to a new set of obligations.…”

“…Our analysis speaks further to an emerging literature that worries about the disincentive effects of such redistributive norms. Baland, Guirkinger, and Mali (2011) show how people take out costly loans in order to conceal their income, while Platteau (2014) sees migration as a means to escape the prying eyes and incessant demands of the kinship group. The kinship poverty trap model of Hoff and Sen (2006) predicts possible resistance from the home communities as they feel threatened by productive forces leaving and severing links with home to escape taxing demands for assistance.…”

Why Do Poor People Co-Hold Debt and Liquid Savings?

“…I examine the impact of income uncertainty on the self-financing amount (SFA). The SFA is the amount of debt that can be repaid, or self-financed, with existing savings (Baland et al, 2011). If the theory of liquidity needs is valid, co-holders facing higher income uncertainty should hold a higher SFA (Gathergood & Weber, 2014).…”

“…Fourth, co-holding is a consequence of a lack of self-control (Atkinson et al, 2013;Morduch, 2010). Finally, individuals co-hold to escape forced solidarity vis-à-vis family members and friends (Baland et al, 2011).…”