Science and Technology Mailing List Archive

["Dick Tinsley" <<address removed>>]

We still have not had a real major discussion on credit. So allow me to be 
really provocative, or more so then normal, and ask if we should take a closer 
look at the informal credit system as perhaps representing the real cost of 
sustainable credit.  

I recognize that informal credit normally has a 100% seasonal interest rate, 
normally paid in kind rather then cash, and thus sounds like pure usury rates.  
However, may smallholder appear to favor this over institutional credit with is 
substantially lower interest rates.  Thus, it might be good to take closer look 
particularly at what are the administrative cost to the lender for providing 
this loan.  

First the lenders have to quote the highest rate they will accept and factor in 
all the possible cost.  They can always discount the rate for clients make 
rapid high quality payment but can not increase the rate. 

Second, what percent of the farmers are going to queue up in front of the 
lender shortly after harvest to make their payments? What percent will have to 
be chased down giving lame excuses for delaying payment, or even require an 
assistant of the lender to attend the borrowers harvest to assure the in kind 
payment.  This will increase overall cost to the lender that has to be 
recovered from the interest.

For in-kind payments how often will the bag of rice or maize be clean ready for 
market vs. full of chaff, stones, empty grains and have to be rewinnowed with 
up to 25% of the  bag being discarded.  The discards represents a direct 
deduction in the payment and the rewinnowing an additional cost.

Finally what is the default rate.  

All of this has to be factored into the quoted interest rate, but they are 
legitimist cost of providing the loan and which the lender is entitled to 
recovery.  Again have we made assumptions about the cost of doing business that 
may not hold true, but never verified.  

If we offer an institutional interest package that substantially undermines the 
real cost of administering credit, then it will not be sustainable once 
external funding ends, and thus poor investment for donor funds.  Just a 
publicity opportunity of the donor good intentions for the beneficiaries.

The above examples of the administrative cost for informal credit come from a 
brief study undertaken in Tanzania.

Perhaps it is heresy according to conventional development wisdom, but by this 
time I hope most of your recognize that my heresy as some rational base.

Something new to think about as we wrap up the forum.

Dick