Institutional Arrangements to Ensure Willingness to Repay in Financial Markets: A Case Study of Paraguay

This paper examines the consequences of the deficiencies in the legal protection of rights of creditors and the low efficiency of legal enforcement on the functioning of credit markets in Paraguay. It investigates how various segments of the financial market develop remedies to work around legal and enforcement limitations.

The case study analyzes:

• The macroeconomic environment and financial evolution that led to the financial crisis currently faced by Paraguay;
• Characteristics of the legal framework of the country in relation to economic claims;
• The structural deficiencies in the formal financial sector and its causes, including willingness to repay considerations;
• The informal financial market in Paraguay.

Finally, the paper comments that:

• The solutions developed by the formal and informal sector, to counter the flaws in financial contracts, have not succeeded well due to strong structural deficiencies;
• Credit shortage, high interest rates and short-term orientations are dominant features in Paraguay;
• Analysis of Micro-credit Global Program suggests efficient alternative mechanisms to solve the information and enforcement problems;
• These mechanisms can be used as a useful reference point for ongoing financial reform process in Paraguay.