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The insurance premium in the interest rates of interlinked loans in a small-scale fishery

Published online by Cambridge University Press:  30 August 2018

Marie-Catherine Riekhof Open the ORCID record for Marie-Catherine Riekhof [Opens in a new window]
Marie-Catherine Riekhof*
Affiliation:
CER-ETH – Center of Economic Research at ETH Zurich, Zurich, Switzerland
*
*Corresponding author. E-mail: [email protected]
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Abstract

Interest payments based on income flows are a common feature of informal loans. Such so-called ’interlinked loans’ can be seen as insurance against very low disposable incomes, as interest payments are lowest when income turns out to be low. This paper examines whether interlinked loans indeed contain an insurance premium and how those premia are determined. A simple theoretical model predicts that interest rates of interlinked loans increase with income volatility when insurance premia exist. Based on data from a small-scale fishery in India, calculations show that, on average, lenders receive 25 per cent of the income, which corresponds to an average interest rate of 49 per cent p.a. A panel data analysis confirms theoretical predictions that interlinked loans contain an insurance component paid by the borrowers.

Keywords

Indiainformal credit marketsinformal insuranceinterlinked contractsinterlinked loaninsurance premiuminterest raterisk-sharingsmall-scale fishery

JEL classification

Q22: Fishery • Aquaculture Q54: Climate • Natural Disasters and Their Management • Global Warming O17: Formal and Informal Sectors • Shadow Economy • Institutional Arrangements O16: Financial Markets • Saving and Capital Investment • Corporate Finance and Governance H23: Externalities • Redistributive Effects • Environmental Taxes and Subsidies O31: Innovation and Invention: Processes and Incentives
Type
Research Article
Information
Environment and Development Economics , Volume 24 , Issue 1 , February 2019 , pp. 87 - 112
Copyright
Copyright © Cambridge University Press 2018 

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