On the use of informal lenders as conduits for formal credit : the case of the national agricultural productivity programs in the Philippines

By non-financial institutions, we refer to input suppliers, traders, millers, and/or processors of agricultural commodities. It is generally known that these non-financial entities comprise an important source of credit for rural borrowers. Not only do informal loans involve lower borrower transaction costs, they are also more flexible with respect to both timing and use. Non-institutional lenders possess a comparative advantage over financial institutions in lending to farmers because of the stronger informational links they have with the activities of their rural clientele. Often, these links derive from dealing with the borrower in some other capacity involving a transaction in another market. This allows lenders to effectively enforce repayment and, as a result, incur lower transaction costs and risk. The view that informal lenders perform a useful function in rural financial markets and operate efficiently has gained wider acceptance in the past decade. The failure of supervised credit programs to eliminate the informal moneylenders is now well documented. A number of policy alternatives with regard to the informal credit market have been advanced: (a) that government not do anything, simply allowing the unhampered operation of informal lenders; (b) that a more competitive environment be promoted by allowing formal institutions to match the terms obtainable in the informal market; and (c) that the informal lenders be co-opted and used as lending channels for formal credit in the rural areas. In this paper, we focus on the National Agricultural Productivity Program (NAPP) in the Philippines. The NAPP consists of several programs aimed at providing credit to the agricultural sector by using, among others, informal lenders as conduits. The paper discusses the background, scope, mechanics and status of the NAPP, concluding with some observations and comments about the program. (Author abstract)