The Performance of Village Intermediaries in Rural Credit Delivery under Changing Penalty Regimes: Evidence from Senegal

This paper evaluates use of village intermediaries in mitigating information problems in rural credit delivery. Its analysis draws on study of sections villages operating in Senegal's Peanut Basin. Results show that:

• When intermediaries expect to incur a substantial penalty if borrowers default, they engage in appropriate screening and allocate credit to good borrowers;
• If default penalty is lowered, the intermediaries dramatically change behavior, allocating limited credit to people unlikely to repay.

The paper concludes that intermediaries are potentially efficient in allocating credit, but extreme care should be taken in structuring their incentives. Only when it is in their interest to make good lending decisions will they contribute to sustainability of rural credit markets.