Based on the need to find criteria for balance of interests of the bank, borrower and regulator, the article explores the question of the legal nature of the credit agreement and the loan agreement.
This paper examines Russian households’ strategies for choosing either the formal or informal banking sector as a source of credit. We aim to find out why households, when deciding to raise borrowed funds, refuse to become banks’ clients and prefer to borrow from individuals - friends, colleagues, relatives and other private parties. We use the results of Russian household survey “Monitoring the Financial Behavior of the Population”, conducted by National Research University Higher School of Economics, Moscow, and WCIOM in 2009-2010. We show that subjective financial literacy – estimated by households themselves - reduces the probability to borrow from informal sector only if the respondent believes that he has excellent (5 out of 5) knowledge and skills in the field of finance. This is true for only 1.5 percent of the respondents, so we measure different components of financial literacy: understanding of percentage calculation and related mathematical skills, understanding of risk-return dilemma, accounting in household finance. The data suggests that these aspects of financial literacy influence differently the household’s choice of informal market. Households that can correctly calculate percentages are less likely to choose the informal sector and, by contrast, understanding the return-risk dilemma increases this probability. Another significant factor is respondents’ credit discipline. Households that do not think it’s obligatory to meet financial obligations and to repay the loan on time, are less likely to borrow from private lenders and, thus, more likely to be among bank clients. Our findings are also in line with credit rationing theory. We show that better financial conditions reduce households’ probability to use the informal loan, preferring a bank loan instead.