Effects of Land Titles on Access to Credit

"This thesis focuses on the effects of land titles on access to formal credit as a means to invest in small businesses in two settlements in Lima, Peru. This was done through a programme carried out by COFOPRI and promoted by the Peruvian government and co-financed by the World Bank expecting to alleviate poverty and improve the livelihoods of the new formal settlers through three specific goals: ? To facilitate the access of the low income population to formal sector credits using their title deed. ? To promote the formal real estate sector market in poor urban neighborhoods ? To provide incentives to invest in small enterprises, housing and basic services. This land titling programme is based on the theory of Hernando De Soto which argues that informal properties can be turned into tradable commodities and thus be used to accumulate capital and invest it into better houses. Investment may also be made in starting small businesses but this has not materialised. The objective of this research is to ascertain why this has not happened given the fact that the project was specifically designed to enable beneficiaries to use their title deeds as collateral to gain capital for starting small business. My findings focused on different aspects of accessibility to formal credits from the perspectives of both borrowers and lenders in an attempt to answer my main research question: Why has the increase in access to formal credit been less than foreseen by the Land Titling Programme? In order to help me answer this question, I have divided it into the following sub-questions: 1. What are the lending criteria the banks apply to the poor? 2. What is the household need for formal credits in relation to business investment? 3. How far can vulnerable household assume the risk of formal credit? 4. What have been the sources of finance used by the beneficiaries of this programme so far? 5. What have been the other benefits of having a land title? Since De Soto argues that formalizing land tenure will alleviate poverty by increasing access to formal credit using a title deed as collateral, the concepts of informality, access to formal credit by the poor and poverty have been studied on chapter 2. This is an explanatory study and was conducted in two human settlements located in extremely poor areas in the Northern Cone of Lima, Peru. I used both quantitative and qualitative research instruments namely: a survey, in-depth interviews, case studies and two focus group discussions. With the beneficiaries of the land titling programme I conducted surveys, in-depth interviews and focus group discussions to complement the information received. I also conducted in-depth interviews with senior officials from different micro finance lending institutions and from the World Bank and COFOPRI to be able to triangulate my data. The main research findings were that no title deed is required to obtain access to formal credits. Commercial banks and micro finance lending institutions in Peru base their assessment on the ability to repay from the borrower. Another aspect of De Soto's theory is that he assumes that all poor people are efficient entrepreneurs in possession of dead capital that is capital that cannot be used as collateral to access to formal loans, and therefore cannot develop themselves as entrepreneurs. But of the seventy survey respondents I found that only three were micro entrepreneurs (4%), meaning that not everybody is an entrepreneur but only a very small number. The majority who are not entrepreneurs will not request a loan to develop businesses that they don't have. Affordability and vulnerability are two concepts that De Soto does not take into consideration because when poor and vulnerable people request a formal loan it will hardly lead to business development and this may explain why fewer people than expected requested access to formal sources of credit to develop their small businesses. I conclude the thesis with a consideration of the value of De Soto's theory and make recommendations which I believe would improve the development of poor settlements in poor urban areas in Peru.