Determinants of Informal Borrowing: Evidence from Households in 11 Rural Villages in Cambodia

Abstract

Informal borrowing remains an important source of financing for rural Cambodian households, exposing them to exploitative interest rates. This study examines the determinants of informal credit reliance using survey data from 1,183 households in 11 villages. We analyze how financial literacy, measured based on understanding of basic financial and economic concepts, social capital (based on community-based group participation), and household characteristics shape borrowing behavior. Higher financial literacy is significantly correlated with a lower likelihood of relying on informal loans. Financeor credit-related group membership reduces informal borrowing; other community group membership does not. Household income and residential land ownership reduce reliance on informal borrowing. Household head's age has nonlinear effects. Reliance on informal credit initially declines with age, reflecting greater experience. Increases observed at older ages may be related to changing economic circumstances. Combining financial literacy enhancement, income improvement, and finance-related community networks can promote safe and sustainable financial inclusion in Cambodia.