Problems with supply - leading finance in agricultural development

This report appraises this prevailing strategy and proposes several reforms. Supply-leading finance seeks to transfer resources to and stimulate entrepreneurial responses within the modern growth sectors of the economy. Thus, agricultural credit institutions are created on the premise that they are effective tools of modernization and social change. However, evidence indicates that it is marketing conditions and price policies, not credit (and especially not long-term credit), which impede growth in farm income. Further, the justifications for low interest rates (e.g., improved income distribution, introduction of new techniques) are outweighed by the destructive effects of low rates - namely, the diversion of attention from the true problems (e.g., low rates of return in agriculture) and appropriate remedies (e.g., direct subsidies, market reforms). It is therefore not surprising that most supply-leading credit institutions lack adequate deposits, rely on donor or host government funds, are poorly managed, supervise credit too closely, and are susceptible to political interference. They are plagued by operational problems such as irregular financial flows, loan costs not covered by interest rates, use of reserves and new capital to defray operating costs, slow loan appraisal and disbursement, high delinquency and default rates, and use of a planner"s rather than a banker"s approach to credit. The authors urgently propose that agricultural credit institutions: (1) offer a full range of financial services; (2) use deposit facilities and bond issues to mobilize local resources and acquire information on borrowers; (3) raise loan rates to cover costs, especially in the face of inflation; (4) reduce lending costs by increasing staff responsibility and accountability; and (5) improve loan appraisal systems and ensure sanctions against those who default. Governments should use direct rather than credit subsidies for the farm sector, reduce inflation, and support realistic product and input prices. A 27-item list of references (1966-81) is appended.