Pretending to Be Poor: Borrowing to Escape Forced Solidarity in Cameroon

Abstract

From field observations of credit cooperatives in Cameroon, we find that 19% of the loans taken are fully collateralized by savings held in the same institutions. This behavior is costly to the borrower, as it represents a net interest payment of about 24% per year. While traditional explanations may partly explain this behavior, interviews with members of the cooperatives suggest the following new rationale: members resort to borrowing to signal to friends and relatives that they are poor and do not have savings available. By doing so, they can avoid requests for financial help. We develop a signaling model to analyze the conditions under which this behavior is an equilibrium outcome.