Rural Finance in Developing Countries

This paper highlights that:

• Agricultural credit systems justified by shortages of short- and long-term finance that have arrested agricultural growth, delaying/preventing adoption of new production technology and intensive nonlabor inputs;
• Commercial lending institutions focus on large-scale farmers and ignore small-scale farmers because of trnsaction costs, collateral and risk;
• Shortage of formal credit markets has been accompanied by the persistence of informal credit institutions which disburse funds rapidly, and the transaction costs for borrowers are low;
• Specialized agricultural credit institutions have suffered from design deficiencies and cannot function as true financial intermediaries that mobilize deposits to make loans.

The solutions include:

• Lending groups and credit cooperatives could reduce both transaction costs and the risks involved in lending to small farmers;
• State or donor support should focus on institution-building and development for viable rural financial institutions.