The informal borrowing ratio in Turkey

Abstract

This study aims to analyze empirically the behavior of individuals with respect to the choice between formal and informal borrowing. Informal borrowing stands for the borrowing practiced through informal institutions such as friends, relatives, moneylenders, other informal financial institutions whereas formal borrowing is defined as borrowing from banks and other formal credit institutions. The examination of the reasons behind the preference of informal versus formal type of borrowing is expected to contribute to the understanding of the structure of credit markets with a demand side analysis. Data from the Credit Card Consumer Survey conducted in 2009 in Turkey is used, in which 1014 participants have positive debt. The zero/one inflated beta regression model is utilized to estimate the proportion of informal borrowing in total debt, allowing the possibility that the boundary values of zero and one are generated through different decision processes. The results indicate that while informal borrowing cannot be completely eliminated since it is an option especially for people who borrow in higher amounts or people who are credit constrained, it can be reduced by policy makers and pioneers of the financial sector through enhancing integration to formal financial services and finding solutions to credit constraints.