Rational Irrationality: Borrowing from Informal Moneylenders in Uganda

If you needed a loan, would you borrow from a friend who charges an interest rate of 228% per annum when you could pay only 20% per annum at a bank? In Uganda, many people continue borrowing from expensive individual moneylenders despite the prevalence and accessibility of microfinance. I show, using data from interviews with Ugandan moneylenders and borrowers, that this seemingly irrational choice is rational, once we account for non-economic costs – convenience, flexibility, and trust. I develop a rational choice framework that engages the discussion of the advantages of institutions that are built on social capital. Using this case and framework, I address the question of the appropriate role for the government in the informal sector.