Default and Liquidity in the Management of the Bnda Lending Program in Ivory Coast
Dia, Bernadette
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https://hdl.handle.net/2142/69871
Description
Title
Default and Liquidity in the Management of the Bnda Lending Program in Ivory Coast
Author(s)
Dia, Bernadette
Issue Date
1986
Department of Study
Agricultural Economics
Discipline
Agricultural Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Agricultural
Abstract
Default influences liquidity as well as being influenced by liquidity. While such effects have been discussed in previous studies on liquidity management by farm borrowers in developing countries, they were not explicitly determined in the empirical analyses. Instead these studies assume that a net lending cost of zero combined with an all-cash loan disbursement will bring the borrower to value the credit reserves of the lending program and hence repay his debt as much as he can. This study expands on previous work by empirically testing this hypothesis for the case of the "Pret de Faisance Valoir Normalise" (PFVN), a BNDA credit program for individual medium-sized Ivorian farmers.
In our work we modify a Liquidity Specified Linear Programming (LSLP) model to include default variables and expand it over a period of two years with a 4 season-specification per year. We validate this default-augmented form of the LSLP model with data gathered in a survey of farmers from BNDA's center district Bouake. The model is then used to determine the conditions for a zero net lending cost by varying (1) the cost of default, (2) the interest rate for BNDA loans, (3) the credit limit for BNDA loans, and (4) the cost of delinquency. It is also modified to include liquidity management vectors for BNDA credit in order to determine the combined effect of a zero net lending cost and an all-cash disbursement of BNDA loans.
The net lending cost for BNDA can be reduced to zero by increasing (1) the default cost to 2.40 CFAF, (2) the interest rate to 29%, and (3) the loan limit by 30%. Gains to the borrower also are reflected in a larger value of the objective functions and in cash available. If in addition to these three conditions BNDA adopts a policy of an all-cash loan disbursement, it earns some profit from its operation. But while the borrower still gains from a larger value of the objective function, cash available decreases. This decrease, however, is offset by higher credit reserves.
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