| By: |
Murizah Osman Salleh (Bank Negara Malaysia and Bangor University);
Aziz Jaafar (Bangor Business School);
M. Shahid Ebrahim (Bangor Business School) |
| Abstract: |
Permanent disequilibrium in mainstream credit markets have pushed the unbanked
and underbanked households to frequent high cost payday loans for their
liquidity needs. Associated with the latter are welfare-reducing issues of
predation and debt-entrapment. In response to this market failure, we expound
a simple model that integrates inexpensive interest-free liquidity facility
within an endogenous leverage circuit. This builds on the technology of ROSCA/
ASCRA/ mutual/ financial cooperative and cultural beliefs indoctrinated in
Islam. Results indicate that such a circuit moderates adverse selection and
moral hazard issues more efficiently than payday loan and mainstream
financier. Additionally, it does not suffer the drawbacks of welfare-reducing
payday loans and also addresses financial exclusion in mainstream credit
markets. |
| Keywords: |
interest-free loan, payday loan, financial exclusion, liquidity facility, cooperatives |
| JEL: |
D14 G29 G32 Z12 |
| Date: |
2012–07 |
| URL: |
http://d.repec.org/n?u=RePEc:bng:wpaper:12008&r=ara |