Do Property Titles Increase Credit Access Among the Urban Poor? Evidence from a Nationwide Titling Program

The collateral value of landholdings is generally assumed to increase with ownership rights, thereby improving credit access among landholders. In situations of poverty, however, this outcome is uncertain because of other significant barriers to lending. To test whether proof of property ownership promotes the use of low-income housing as collateral, we evaluate the impact on credit supply of obtaining a property title through a landtitling program in Peru. By directly observing whether loan applicants are requested to provide collateral, we can isolate the effect of property titles on credit supply from their effect on demand by comparing loan approval rates when titles are requested to rates when they are not. Our results indicate that property titles are associated with approval rates on public sector loans as much as 12% higher when titles are requested by lenders and no relationship between titles and approval decisions otherwise. In contrast, there is no evidence that titles increase the likelihood of receiving credit from private sector banks, although interest rates are significantly lower for titled applicants regardless of whether collateral was requested. The failure of commercial banks to increase their rate of lending to households that obtain property titles through government programs has important implications for the potential effects of property reform on economic growth and poverty reduction. One explanation for this failure is that titling programs reduce banks’ perceptions of their ability to foreclose. This is supported by data from Peru indicating that individuals with title have less fear of losing property in cases of default.