Determinants of Credit Rationing: A Study of Informal Lenders and Formal Credit Groups in Madagascar

The paper presents an analysis of determinants of loan rationing by informal lenders and by members of community based groups that obtain credit from formal lenders using survey data from Madagascar.

Land as a criteria for loan rationing neither plays a role for informal lenders nor for members of the groups. Informal lenders and group members can obtain information about the wealth, indebtedness, and income potential of the loan applicant. Findings reveal that:

• Groups obtain and use information about worthiness of the credit applicant in a way similar to that of informal lenders;
• Both types of lenders use applicant's debit-servicing obligations and income as the main criteria for credit rationing.

The paper concludes that theoretical arguments of community-based groups having an information advantage over distant formal bank agents are empirically confirmed.