A synthesis of AID experience : small-farmer credit, 1973-1985

reviewed its small farmer credit (SFC) programs to determine why so many had recently failed and to set conditions to improve future SFC programs. The effect of the Spring Review is analyzed in this study, which is based on an examination of 150 evaluations of 80 SFC projects undertaken between 1973 and 1985 and on indepth analyses of 50 of those projects. The study found that since credit is typically a very small part of farm production costs, its absence is seldom a major constraint and its presence, even when highly subsidized, cannot offset other constraints. Specifically, the roughly one-third of the projects that proved successful were those that recognized three factors. (1) Farmers can invest credit productively only when appropriate technology and supporting services such as inputs, extension, and marketing are available. (2) Developing country policies (price controls, taxes) and economic conditions (inflation, interest rates) often need reform if agricultural development efforts are to succeed. (3) Mechanisms for credit delivery/recovery (assessment of creditworthiness, loan disbursements, loan monitoring, loan recovery) are best handled on a local level. Farmer groups, when well organized and committed to development, were positive factors in this regard. The thoroughness of a loan application form and of the loan review process had little relationship to repayment rates. The key factors were the local loan officer's ability to judge character and creditworthiness, and good accounting, recordkeeping, and control practices in the local loan institution. Projects that worked with an existing rather than a new institution succeeded best, as did projects that provided technical assistance and training to improve institutional capacity. The study also found that provision of an interest subsidy to borrowers undid a large number of projects and that cheap credit can create resource misallocations by encouraging inappropriate technology and inappropriate investment - lenders that provided cheap credit were not financially viable, whereas those that set lending rates high enough to cover their cost of capital were successful.