Question

What can we learn about borrowing and lending behaviors in Nigeria Udry (1990)?

According to Udry (1990), how do people borrow and lend in Nigeria? What is a state-contingent loan?

Answer 1

As per economist Udry, It is evident that the lender does not fully know characteristics of borrower which is also theory of adverse selection . There was a asymmetry observed in lending and buying behaviour due to absence of formal contracts in rural areas of Nigeria in 1990. Thus it is fairly important that risks should be duly considered while lending and contracts should be formal mentioning complete details of deafult rates in case of inability to repay loans along with maturity date.

State contingency loans allow people to walk away from loan without paying penalty. In case they defaulted on loans. This is basically clause mentioned in contract by state government which helps people avoid penalties. In Nigerian rural market, people got benefits of paying lesser repayment amount in case their financial situation took hit.

According to Udry, people in Nigeria borrow loans keeping harvested crops as mortgage and without formal contracts and date and amount to be repaid. Many times lender does not know risk associated with borrower because it is assuned that information is freely flowing in rural area about lenders and borrowers.