ABSTRACT
The previous chapter examined credit as a rationed commodity in the sense that there is quantity, rather than price closure. Quantity rationing in the informal credit market is distinct from other types of quantity closure as it operates in a highly personalistic environment, with the size of loan becoming a distinctly personal attribute. This implies that the lenders set their own criteria for determining the subset of clients they will contract with at a given loan price. The formal sector, to the extent that it concentrates on "prime risks," uses the criterion of the implicit collateral in order to render the loans observationally equivalent. The informal sector is conceded the vast residual loan demand that does not satisfy formal collateral requirements. Thus, informal lenders enlist a personalistic relationship to obviate the adverse selection of risk that a credit transaction may entail.
