Microfinance, Regulation, and Uncollateralised Loans to Small Producers in Argentina

Publication Date: Feb 2001
Published by: Microfinance.com
Document Type: Paper

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The essence of microfinance: uncollateralised loans to borrowers without a constant source of income from a wage job

Microfinance can help small farmers and the self-employed who cannot or will not post standard physical collateral such as a mortgage on real estate. In fact, lenders may not accept collateral for small loans since the cost of seizure and sale may exceed the debt owed. Lack of collateral, however, increases the costs for lenders to judge risk and to enforce repayment

Finds that, in spite of a lack of market failures, the bundle of reforms linked to the fixed-exchange-rate regime that led to economic recovery in Argentina constrained access to loans for small producers

Explains how the key to access to microfinance for small producers in Argentina is not a relaxed regulatory standard

The estimated effect of the type of guarantee on the cost of a loan suggests ex ante that the break-even interest rates for uncollateralised loans to small producers are close to those of consumer loans

Summarises the constraints to access to microfinance:

• the financial system is still shallow. As long as deposits are small, short, and swiftly withdrawn, loans will be small, short, and scarce
• most lenders who make uncollateralised loans can lend all that is demanded and earn high profits from salaried consumers who are better clients than small producers. Competition in demand is not a market failure that deserves intervention
• weak registries for liens on movable goods and incomplete credit bureaux records reduce the value of chattel as collateral and reduce the incentives for borrowers to preserve clean credit records