Informal finance through land pawning contracts: Evidence from the Philippines

Abstract

Land pawning contracts have increased in importance in Philippine rice growing villages, and this article examines the determinants of choice of pawning contracts and the observed loan size. The analysis shows that pawning is an informal credit instrument used by small farmers to obtain large loans to finance productive investments, such as non‐farm employment, where the returns to investment are high. The econometric results suggest that poorer farm households pawn‐out land, while wealthier farm households pawn‐in. The observed loan size is explained by reputation of pawners and rice cropping intensity in the region.