Part 5|DF201|Q 5 Summary

Unit 6.2.1 The Traditional Rural Credit Policy Re-examined
Main Assumptions
1. Credit was considered to be a major constraint for farmers.
2. The existing credit shortages led to high interest rates on loans.
3. Concessionary institutional loan arrangements were needed in order to break or counteract the vicious circle of poverty and indebtedness.
4. The equity considerations of high interest rates were reinforced by their likely implications for borrowing decisions.
5. The limited savings capacities of poor rural households reinforced the case for credit intervention so as to relieve the financial constraint in rural economic development.
6. Rather than wait for economic activity to expand the demand for financial services, 'supply-led' strategies were needed to stimulate such activities and to cater for the credit 'needs' of the rural sector.
7. Formal financial institutions were seen to be the forefront of these strategies to ration and direct funds to target groups and activities, and to enforce strict loan supervision.
And then for Policies:
1. Targeted credit programs.
2. The instruments used loan guarantees, concessionary lines of credit and subsidized interest rates to end borrowers.
3. Little attention paid to mobilizing rural savings.
4. Relying almost exclusively on government and donor funds.
5. Distribute loans quickly and to reward staff on the basis of loans made (rahter than on results achieved or other indicators such as loan recovery or returns on investment.
6. State intervention in the agricultural sector.

D.H. Penney:
...but the resources used in credit programs rarely give a satisfactory profit compared with the returns from investments in agricultural research and extension or in social capital (such as roads).

It is not difficult to discover whether farmers need additional capital...simply ascertain whether farmers can afford fertilizer, new tools, and so on. ...many peasant farmers can afford to finance some investments from their own resources.

But even if some is being purchased is it fairly being distributed? Not to say that we could not expect some marginal farmers to choose different lines of work.

Why are credit programs advocated an pursued so vigorously?
1. Governments and economists are unaware of the attitiudes of peasant farmers toward debt and credit.
2. They forget that credit does not necessarily represent capital. Capital is not created merely by increasing the supply of money.
3. ...they fail to realize that the growth of such institutions is as much a result of as a cause of development.
4. do not recognize the powerful economic reasons for the high nominal rates of interest charged in so-called unorganized money markets.

A Rural Financial Market (RFM) consists of relationships between buyers and sellers of financial assets who are active in rurla economies.