Barriers to Credit Access in Rural Sri Lanka

Examines existence and scale of entry barriers into formal and informal segments of financial markets. Investigates assumption that borrowers base their financial decisions on one particular loan component, such as interest rates or transaction costs.

Comparatively analyses nine components of formal and informal financial contracts in two Sri Lankan communities. Finds that:

• Interests rates are only one of a set of loan costs that include opportunity costs of foregone labour, costs of travelling to the lender and administrative costs like paying for application forms;
• Transaction cost analysis is biased towards customers who have already entered into a credit transaction;
• Collateral requirements and guarantor arrangements are seen as main barriers to entry into institutional rural credit markets in the two Sri Lankan communities;
• Banks are an attractive credit source for those with access to them;
• Friends and relatives are the low- cost credit source for small sized loans;
• Moneylenders disburse loans quickly but at high interest rates and sometimes require a deposit of collateral;
• NGOs limited loan amounts and fairly high interest rates limit their attractiveness to borrowers.

Recommends further research into the nuances that this study of borrower decision making introduces.