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This chapter examines credit relations in rural Afghanistan, specifically the reciprocity of formal and informal credit. It shows how microcredit loans have underlined existing social relationships and established new ones where they hitherto did not exist. It is the importance of such communal interests, or collective consciousness, which has created a sense of solidarity between the actors and forms the basis for political participation.

This chapter focuses on pawnshops and the institutions of pawnbroking. Studies show that large numbers of poor people and especially those who are unbanked use pawn loans by leaving collateral. This institution has existed for centuries and while attention has shifted away from it, the informal pawn broker remains a source of survival for the very poor. And this is not unconnected to what happens in the larger, formal economy. After the global financial crisis that began in the United States in 2007–2008, quickly engulfed the world, and became the protracted Great Recession, the pawnbroking industry in the United States and Sweden grew by an astonishing 20 percent per year, as poor people were forced to turn to informal credit for their survival. Despite this industry's importance, pawnbroking has characteristically received little attention and also little regulation. The chapter then raises a host of questions regarding the welfare consequences of these informal lending markets in rich countries and how they could be regulated.

This chapter develops a model of vertical linkage between the formal and informal credit markets which highlights the presence of corruption in the distribution of formal credit. The existing moneylender, the bank official, and the new moneylenders move sequentially, while the existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. The analysis distinguishes between two different ways of designing a credit subsidy policy. If a credit subsidy policy is undertaken through an increase in the supply of institutional credit, it is likely to increase the competitiveness in the informal credit market and lower the informal sector interest rate under reasonable parametric restrictions. Any change in the formal sector interest rate has no effect. However, an anticorruption measure (increase in penalty) unambiguously lowers the interest rate in the informal credit market. Finally, the chapter examines the effects of alternative policies on the incomes of different economic agents in our model.