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   The informal credit market:  A study of default and informal lending in Nepal Norunn Haugen The thesis is submitted in the partial fulfilment of a Master degree in Economics Department of Economics University of Bergen, February 2005  i   Acknowledgements Thanks to Magnus Hatlebakk for inviting me to participate in the fieldwork in Nepal and for good ideas and comments. Thanks to my supervisor Gaute Torsvik for valuable comments throughout the process of writing this thesis. Thanks to Guri Stenvåg for the company and friendship in the field. I would also like to give a special thank to my friends and field assistants Sachit, Naresh, Sanjaya, Ranjit and Krishna. Thanks to Chr. Michelsen Institute (CMI) of development studies and human rights for  providing me with good facilities and an inspiring atmosphere from which I have benefited. Thanks to students and staff at the Institute of Economics at University of Bergen. Bergen, February 2005  Norunn Haugen ii   Table of Contents Map of Nepal............................................................................................................................................................v   1. Introduction..........................................................................................................................................................1   2. A description of the informal credit market......................................................................................................3   2.1 Common characteristics..................................................................................................................................3   2.2 The informal credit market in Nepal...............................................................................................................4   2.2.1 Limited information.................................................................................................................................5   2.2.2 Market Segmentation...............................................................................................................................8   2.2.3 Interlinkages............................................................................................................................................9   2.2.4 High and varying interest rates................................................................................................................9   2.2.5 Credit rationing......................................................................................................................................12   2.2.6 Exclusivity.............................................................................................................................................12   2.3 Summary........................................................................................................................................................13   3. Theoretical Approach........................................................................................................................................14   3.1 Imperfections in the credit market.................................................................................................................15   3.2 Theory of high informal interest rates...........................................................................................................16    3.2.1 A pure risk premium model...................................................................................................................17   3.2.2 The competitive view............................................................................................................................17   3.2.3 The Monopoly view...............................................................................................................................19   3.2.4 Monopolistic Competition.....................................................................................................................20   3.2.5 Fragmented oligopoly............................................................................................................................22   3.2.6 Credit rationing......................................................................................................................................23   3.3 Competing explanations................................................................................................................................24   3.5 Developing empirically testable hypotheses..................................................................................................25   4. Data considerations............................................................................................................................................27   4.1 Primary data.................................................................................................................................................27    4.1.1 The village samples...............................................................................................................................27   4.1.2 Information from lenders.......................................................................................................................29   4.2 Recording data..............................................................................................................................................30   4.3 Categorization of loans.................................................................................................................................31   5. Empirical Approach..........................................................................................................................................34   5.1 The experience from Nepal............................................................................................................................34   5.1.1 Information asymmetries.......................................................................................................................34   5.1.2 Cost of entry for new lenders.................................................................................................................35   5.1.3 Repayment rate on informal loans.........................................................................................................37   5.1.4 Evaluation of security............................................................................................................................40   5.2 Relevant previous empirical studies..............................................................................................................47    5.3 Preliminary conclusions................................................................................................................................51  iii  6. Conclusions.........................................................................................................................................................54   References...............................................................................................................................................................55   Appendix A: Questionnaire...................................................................................................................................57   Appendix B: Survey data results..........................................................................................................................62   Stata commands: Chapter 2................................................................................................................................62   Stata commands: Chapter 5................................................................................................................................69   Appendix C: NLSS data results............................................................................................................................70  iv
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