Political Economy and Rural Loan Recovery: An Example for Bangladesh

Abstract

The rural loan recovery problem in developing countries is frequently analyzed from borrowers and institutional perspectives. But a frequently overlooked problem is that borrowers often are discouraged to repay or institutions are not aggressive enough to recover loans because of political interventions of the government into rural financial markets to derive the benefits of getting re-elected. Failure to address this dimension in recovery analysis may lead to an incorrect prescription of policies. This paper provides an empirical analysis of how political interventions affect rural loan recovery in Bangladesh. The government in Bangladesh intervenes into rural loan allocation and recovery indirectly through financial policies - interest exemption, loan targeting, interest rates - and directly through local political leaders and government officials. The intensity of direct intervention is expected to increase during an election period. Four variables - inflation rate, election years, interest exemption years, and bank type - were included in the model. The empirical results showed that election, inflation rate, and bank type affect the loan recovery negatively, and interest exemption positively.