Informal Borrowing and Lending in Rural Finance

INFORMAL BORROWING AND LENDING IN RURAL FINANCE

INTRODUCTION

This paper presents an assessment of informal borrowing and lending in rural finance with a focus on its advantages and disadvantages. It examines a number of issues related to the functioning of rural credit markets, determinants of rural interest rates, why the government intervenes in rural credit markets and how.

BACKGROUND Commercial banks and other formal institutions fail to take care of the credit needs of peasants, however, mainly due to their lending terms and conditions. It is generally the rules and regulations of these formal financial institutions that have created the myth that the poor are not bankable, and since they can’t afford the required collateral, they are considered not credit worthy (Adera, 1995). Despite efforts to overcome the widespread lack of financial services, especially among peasants in developing countries, and the expansion of credit in the rural areas of these countries, the majority still have only limited access to bank services to support their private initiatives (Braverman and Guasch, 1986). The development of rural finance with respect to informal borrowing and lending has been a subject of intense debate among scholars in recent times. Pearce (2003) defined rural finance as “encompassing all savings, lending, financing and risk minimising opportunities (formal and informal) and related norms and institutions in rural areas”. Also, Schreiner (2000) defined informal finance as “contracts or agreements conducted without reference or recourse to the legal system to exchange cash in the present for promises of cash in the future”.

CHARACTERISTICS OF INFORMAL MARKETS Motamen-Samadian (2012) identifies two main sub-sectors in informal markets: the commercial and the non-commercial sector. In her presentation, she maintains that the commercial sector is based on lending from people with having excess liquidity. On the other hand,

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