The performance of village intermediaries in rural credit delivery under changing penalty regimes: Evidence from Senegal

Abstract

This article concerns the use of village intermediaries to mitigate asymmetric information problems in rural credit delivery. We consider an example from Senegal and examine the intermediaries’ screening of loan applicants. The results show that, when the intermediaries expected to incur a substantial penalty in the event of borrower default, they engaged in appropriate screening, allocating credit to borrowers likely to repay their loans. When the default penalty was lowered, however, the intermediaries engaged in opportunistic screening, emphasising political affiliation and consanguinity in their lending decisions. These results reveal both the potential efficacy of village intermediaries in allocating credit and their extreme sensitivy to penalty regimes.