Do Property Titles Increase Credit Access Among the Urban Poor

A fundamental link in the theory of property rights and economic development is the assumption that the collateral value of landholdings increases with ownership rights, thereby improving credit access among landholders. However, in impoverished settings, it is ambiguous whether strong property institutions can reduce credit rationing given other barriers to lending. A nation-wide urban land titling program in Peru, the largest formalization program targeted to urban squatters in the developing world, provides a dramatic natural experiment for testing whether strengthening property institutions enables lenders to profitably use low-income housing as collateral. This paper conducts an evaluation of early program impact on credit supply using variation in the timing of the program to estimate the average treatment effect of receiving a title on loan approval rates of public and private sector lenders. Detailed data on the information used by banks to screen loan applicants allows us to observe directly the role of property titles in approval decisions, thus enabling us to isolate the effect of titles on supply from their effect on demand. Our estimates indicate that urban land titling is associated with a 9-10 percentage point increase in loan approval rates from the public sector bank for housing construction materials, while there appears to be no effect on the loan approval rate of private sector lenders. However, conditional on receiving a loan, private sector interest rates are an average of 9 percentage points lower, indicating a limited improvement in credit rationing and financial market inequalities for the urban poor.

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