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Abstract
The paper reviews the theory of the impact of loan collateral, and in particular land collateral,
in institutional and non-institutional rural credit markets. Evidence from three Asian developing
countries is presented, showing extensive use of land collateral among institutional lenders in
countries where such collateral is legal. The use of land collateral is more common than other
forms of security, except in places where legal inhibitions on mortgaging agricultural land exist.
Non-institutional lenders are less inclined to use land collateral. However, lenders who do not
have links to borrowers in matters other than finance are more likely to use loan securities. Estimates
of instutional credit supply and demand in rural Thailand confirm that the pledging of land
collateral affects the supply of credit more than group guaranty. It is also shown that larger farmers
are more likely to utilize land collateral. The conclusion is that land collateral is preferred by
instutionallenders as it reduces creditworthiness assessment costs. Attempts to ban or limit collateral
use by decree are motivated by equity considerations, but they will cause loss of efficiency.
Simplification of ownership verification and other policies reducing the transaction cost of collateral
pledging will mitigate the negative equity implications of collateral.