Draft Environmental Report on ARAB REPUBLIC OF EGYPT

This paper discusses issues contributing to this unfortunate record. Historical views on financial markets, a critique of assumptions underlying RFM programs, a summary of RFM problems and policies found in developing countries, and conclusions are included. RFM problems include a shortage of trained personnel to administer lending; this creates data processing problems, etc. Common areas of unsatisfactory RFM performance are also prevalent. Summarized, they are: inflationary erosion of credit portfolios; loan defaults; agricultural loan reticence; failure to provide servives to the poor; inavailability of medium- and long-term loans; no savings mobilization; high loan transaction costs; fragmentation of RFM"s; poor income distribution and asset ownership; and difficulty in introducing credit innovations. The following RFM strategies used by many governments are responsible for this performance. (1) As a result of loan defaults and subsidy cutbacks, institutions, set up to assist specific groups, later channel their credit toward large enterprises to cut risks and servicing costs. (2) Increased credit supplies to RFM"s never reach small farmers. Low interest rates create excess credit demand and therefore credit can be rationed. (3) Since many lenders are widely disbursed, attempts to regulate lending through nationalization have failed. (4) Loan size limits, imposed to increase small lending, increase administrative costs. Lenders instead extend multiple small loans to former large borrowers. (5) Lending quotas, which require lenders to lend to specific groups, are circumvented. Many lenders redefine their loans to fit quota laws. (6) Loan guarantees that spread credit risk also create administrative problems. (7) Rediscount spreads, which allow local lenders to lower their rates, discourage savings mobilization. (8) Concessional interest rates generate excess credit demand excluding the poor from credit. Policy suggestions include: promoting rural savings and deemphasizing quota lending and concessional rates. RFM"s should support, not lead, development initiatives. A 26-item bibliography (1949-79) is appended.