Introduction: Imperfect Information and Rural Credit Markets—Puzzles and Policy Perspectives

RURAL CREDIT MARKETS have been at the center of policy intervention in developing countries over the past forty years. Many governments, sup-ported by multilateral and bilateral aid agencies, have devoted considerable resources to supplying cheap credit to farmers in a myriad of institutional settings. The results of many of these interventions have been disappointing. Despite high levels of subsidy to rural credit in the Asian countries surveyed in this part of the book, many farmers-especially small farmers-depend for credit on moneylenders whose interest rates remain extremely high. (See table 2-1.) One explanation for the failure of public credit institutions to drive out the traditional moneylender or drive down the interest rates charged must be that public policies were based on an inadequate under-standing of the workings of rural credit markets. There typically exists a dual rural credit market in developing countries. In the formal credit market, institutions provide intermediation between depositors (or the government) and lenders and charge relatively low rates of interest that usually are government-subsidized. In informal credit markets, money is lent by private individuals-professional moneylenders, traders, commission agents, landlords, friends, and relatives-generally out of their own equity. The objective of this chapter is to provide a framework for assessing the relationship between the formal and informal sectors of rural credit markets and the consequences of government interventions in formal credit markets.