Page 5
Difficulties with Institutional Credit
13. In the beginning it was believed that the mere fact that institu¬
tional credit was much cheaper than the credit from private sources would
make it easier for co-operatives and other credit institutions to drive
out the money lender, if sufficient funds were available» In practice
it has been far from easy to substitute money lender.
14. The explanation given by officials and policy makers in several of
the developing countries for the unsatisfactory slow pace 'of substitution
of ncn-institutional credit by institutional credit is the lack of finan¬
cial resources and trained personnel of the credit institutions in these
countries. It is, though, well recognized that the sufficiency of financial
resources and trained personnel is a prerequisite for the successful operation of credit institutions, the vulnerable spot of institutional
credit lies somewhere else, i.e. its impersonal character and all that
flows from it.
15. The strong point of institutional credit
(low
rate ofinterest),
which is the only weak point of non-institutional credit, is outweighed by many disadvantages of institutional credit against the advantages of
non-institutional credit.
16. In the first place, non-institutional credit, being personal, can b
obtained by average farmer within hours. Since a good deal of borrowing by the average farmer in these countries is for consumptive purposes, it often takes the form of emergency credit^ this personal character of non-institutional credit is an enormous advantage and its impersonal charact c
a disadvantage.
17. Secondly, non-institutional credit is granted without all the burden
of administrative formalities
(such
as detailed application forms withtheir numerous indiscreet questions, loan investigations, registration
of deeds, disbursement of loans in installment,
etc.)
inherent in insti¬tutional credit.
idep/et/cus/881-3
Page 6
18. Thirdly, maximum credit limits observed by-!credit institutions are very low as compared to the ones observed by money lenders.
19» All these disadvantages of institutional credit are, in the eyes of
average farmer ih developing countries, too painful to be counterbalanced by the one advantage of its much lower rate of interest.
20. Thus, thé conclusion we draw from the foregoing is that the policy
of driving out money lenders and replacing private credit by institution"!
credit cannot be just thought of in terms of rates of interest, as many leaders of agricultural-banks and co-operative credit organizations in developing countries think.
Policy Implications
21. For the development of sound agricultural credit in developing
countries previous discussion spells out a few policy suggestions which
are discussed belows
(i)
A system of strict supervision of agricultural credit from the beginning to the end is essential;(ii)
To avoid excessive diversion of loans meant for development purposesto consumptive aims it is desirable to provide credit as much as ..possible in kind and the part which has been granted in cash, in
-•••.. .installments. "...
(iii)
Methods and procedures followed by credit institution for grantingloans to farmer must be made less rigid and less cumbersome adminis¬
tratively, so that the farmers may be able to obtain loans at proper-time and place, without going through unnecessary administrative
formalities which cause redtapism.
(iv)
The cost of providing agricultural credit in developing countriesmust be relatively high.
UNITED NATION'S
AFRICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING
DAKAR
LECTURE No. 4
FINANCING OF THE DEVELOPMENT OF AGRICULTURAL CREDIT INSTITUTIONS
Various Methods of Financing Agriculture
1. In most developing countries institutional credit, as mentioned in
the previous lecture, does not yet play a significant role in the provision
of agricultural credit. Institutional credit in most developing countries
1 / constitutes much less than 10 per cent of the total agricultural credit.—
There is,- therefore, genuine necessity for expanding institutional
agricultural credit considerably in near future. This calls for tapping
as efficiently as possible the existing sources of finance and finding
new sources either within the country or abroad. Although many different
ways can be followed in creating funds necessary for financing agriculture, they ultimately boil down to the following three methods:
(a)
Increasing the volume of local currency by the central bank.(b)
Internal savings and foreign loans and grants in local currency.(c)
Foreign loans and grants in foreign currency.2. In general, when choosing between the various methods of financing agriculture the main consideration should always be how much each of
them affects the internal and the external economic balance of the country concerned. In other words, the criterion is to see whether the way'-envisaged is
lii^ly
to give rise to serious inflationary or defla¬tionary tendencies, or enable the government to keep the national economy
relatively in equilibrium.
3. Another important point to be considered in deciding how to finance agricultural development schemes is the provision to be made for the foreign exchange necessary to pay for the imports directly or indirectly
involved in their implementation. Thus, in short,"choosing the appro¬
priate way of financing any specific programme for expanding agricultural
IDEP/ET/CUS/881-4
JULY 1967
Mr. J. C. SAIGAL
1/
Agricultural Credit Through Cò-operatives and Other Institutions.F.A. 0, , 1965.