Credit Access, Selection, and Incentives in a Market for Asset Collateralized Loans: Evidence from Kenya

We study the potential for asset collateralization to expand access to credit in rural Kenya. Increasing the share of a loan for a durable agricultural asset that is collateralized by the physical asset itself (from zero to 96%) while reducing the share backed by financial assets increases loan take-up considerably, with only a very limited impact on repayment behavior and the lender’s profitability. A Karlan-Zinman test finds evidence of small and marginally significant selection effects in some specifications but no evidence of moral hazard. We find no evidence that joint versus individual liability affects take-up or repayment. Loans had real impacts on investment, milk sales and girls’ school enrollment. The lender, a savings and credit cooperative, responded to the study results by offering 80% asset-collateralized loans.