CONTINGENT LOAN REPAYMENT IN THE PHILIPPINES

Using data from the Philippines, this paper seeks to understand how households in thestudy area apparently manage to avoid falling in a debt trap in spite of frequent borrowing.Findings suggest this is achieved via three institutional features. First, most informal debtcarries no interest. As we show in the conceptual section, charging zero interest makes adebt trap impossible. Second, for all debts, repayment is postponed in case of borrower`sdi¢ culty; this is the only insurance feature of debt repayment. Third, while debt principalis seldom forgiven or reduced, interest-bearing debt does not carry additional interest ifdebt repayment is delayed. This prevents interest charges from accumulating and debt fromsnowballing....