Brief: Leveraging Formal Land Rights for Credit Access

This brief distills key information from the Leveraging Formal Land Rights for Credit Access report developed under the USAID Communications, Evidence and Learning (CEL) project. It seeks to shed light on an enduring development question—if formalization of rural land rights does not significantly unlock formal credit through collateralizing land, particularly in Sub-Saharan Africa as theorized, are there alternative mechanisms by which formalization can improve credit access? After reviewing evidence for the collateral pathway, the brief summarizes emerging evidence on three alternative pathways and outlines evidence gaps to close and steps tenure programs can take to create an enabling environment for the pathways to function.

There is widespread agreement among researchers and practitioners that access to finance for small farmers and entrepreneurs makes essential contributions to poverty reduction and economic development. Lack of credit can lead to poverty traps, whereby households are unable to save enough to finance productive investments, and poverty becomes a self-perpetuating cycle
(Demirgüç-Kunt, Beck, and Honahan 2008). Though the expansion of microcredit in recent years has resulted in significant progress, the World Bank estimates that 1.7 billion people around the world remain “unbanked,” without access to formal financial services (Demirgüç-Kunt et. al. 2017).

One of the hypothesized pathways from formalization of land rights to economic benefits is through improved credit access for land holders. Formalizing and documenting property rights can enable owners to offer their property as collateral when seeking loans. Collateral reduces the risks to financial institutions in event of default, and thus can increase their willingness to lend. Access to
credit allows land users to make investments in their land such as improving soil fertility, or investing in irrigation, high quality seeds, or long-term crops and trees, all of which can contribute to increased productivity thereby improving economic benefits for smallholders. While these relationships are not necessarily linear, the ability for smallholders to invest in their land depends
largely on their ability to raise capital, whether from formal or informal sources (Lisher 2019).