Giving credit to the microlenders. Formal microlending, credit constraints and adverse selection: a case study

Discussion paper
, 22 pages
PDF (1.09 MB)
15510IIED.pdf
Language:
English
Published: November 2007
Area(s):
Env. Economics Discussion Paper
ISBN: 9781843696803
Product code:15510IIED

Smallholder farmers have long been denied access to formal credit, largely because of the high administrative fees associated with loans. A possible solution to this problem, which has become increasingly popular, is the use of microcredit financing, where innovative means of securing the loans, such as peer monitoring, are used. This paper examines the effectiveness of formal microcredit schemes as compared to the traditional informal credit sources in a rural shrimp farming district of Bangladesh. We compare the two types of credit by studying the technical and allocative efficiencies of the two groups of borrowers. The findings suggest that farmers using both types of microcredit have difficulty accessing credit, often over-utilising labour in order to reduce the need for inputs that require cash at the beginning of the season, creating inefficiencies in production. However, the informal lenders, with their closer ties to individual farmers, were more successful in identifying those small-holders most likely to make the best use of the borrowed funds. Thus, although formal microcredit schemes do not impose the high administrative fees of traditional formal lending, they do not necessarily solve the problem of how to select successful borrowers.

Cite this publication

Andersson, C., Holmgren, E., , J. and Stage, J. (2007). Giving credit to the microlenders. Formal microlending, credit constraints and adverse selection: a case study. .
Available at https://www.iied.org/15510iied