Loan shark’s contract under asymmetric information  

Oleh:

Jantarakolica, T ; Tongkong, Supa

Jenis: Article from Proceeding
Dalam koleksi: SIBR-Thammasat 2014 Conference on Interdisciplinary Business & Economics Research June 5th- 7th, 2014 di Emerald Hotel Bangkok, page 1-10.
Topik: Loan shark; 5 Cs credit criteria; Asymmetric information
Fulltext: b14-002.pdf (59.22KB)

Isi artikel

Illegal lending or loan shark business has long been operated and become important source of fund for middle and low income people in Thailand. The purposes of this study are to investigate the illegal loan shark processes and make theoretical interpretation of each process. Through individual depth interview of three usurious money lenders and five loan shark borrowers in the construction business, the study found that the sophisticated, more required documents, and time-consuming processes of the commercial bank loan higher the demand for loan shark. The results are consistent with the explanation follow the asymmetric information concept. While commercial banks lower their risk by following the 5 Cs credit criteria (character, capacity, collateral, capital, and conditions), demand more documents and reviewing process, then offer lower interest rate, the usurious money lenders agree to accept higher risk by reducing the criteria to 3 Cs, including, collateral, capacity, and character, demand less or no document with the quick process, but offer mortgage loan or sale on consignment of assets with high interest rate in exchange. Two major types of loan sharks including mortgage loan and sale on consignment of assets provide the loan limit to 20-60% and 40-80% of collateral value, respectively. Construction business owners, interviewee of loan shark borrowers, reveal that they decide to use loan shark financing with very high interest rate for very short term debt only when they face short-term liquidity problem. The findings confirm that information problems lead to transaction cost. Borrowers pay their price through either time-consuming processes of the commercial banks with lower interest rate or quick processes of usurious money lenders but with very high interest rate.

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