ABSTRACT
This chapter presents an analysis of the use in informal finance of specific types of collateral substitutes in four villages in Central Luzon, Philippines, based on a field survey conducted in 1988. Collateral is rarely used in the informal rural financial markets of less-developed economies. Collateral substitutes are used to enforce repayment in the informal credit market in the absence of collateral, The pawning of cultivation rights is one such collateral substitute. The use of various forms of collateral substitutes in the informal credit market derives from the fact that the different types of informal lenders lend for diverse reasons. The use of collateral or its substitutes entails a cost to lenders. If the "specialization hypothesis" is sustained using more complete empirical specifications, the major implication will be that collateral substitutes lead to segmentation in rural informal financial markets.
