Informal Finance Through Land Pawning Contracts: Evidence from the Philippines
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Publisher:Ohio State University. Department of Agricultural, Environmental, and Development Economics
Series/Report no.:Ohio State University. Department of Agricultural Economics and Rural Sociology. ESO (Economics and Sociology Occasional Paper). No. 1775
Land pawning contracts in which the pawner temporarily transfers his land cultivation rights to the pawnee in return for a loan with an agreement to redeem it on loan repayment have increased in importance in Philippine rice growing villages. This paper uses cross sectional data from farm households in five heterogeneous production environments to analyze the determinants of the choice of pawning contracts. The analysis shows that land pawning is an informal credit instrument used by small farmers to obtain large loans to finance productive investments, such as non-farm employment, where the returns to investment are high. An econometric model was developed to examine the factors affecting the choice of pawning contracts and the observed loan size. The results suggest that farm households with poorer quality land, smaller farm sizes and lower physical and human assets pawn out land, while wealthier farm households with larger farm sizes and greater physical and human assets pawn in. The observed loan size is explained by reputation of pawners and rice cropping intensity in the region.