Giving credit to the microlenders. Formal microlending, credit constraints and adverse selection: a case study of shrimp farmers in Bangladesh

Smallholder farmers have long been denied access to formal credit, largely because of the high administrative fees associated with loans. A possible solution to this problem, which has become increasingly popular, is the use of microcredit financing, where innovative means of securing the loans, such as peer monitoring, are used. This paper examines the effectiveness of formal microcredit schemes as compared to the traditional informal credit sources in a rural shrimp farming district of Bangladesh. We compare the two types of credit by studying the technical and allocative efficiencies of the two groups of borrowers. The findings suggest that farmers using both types of microcredit have difficulty accessing credit, often over-utilising labour in order to reduce the need for inputs that require cash at the beginning of the season, creating inefficiencies in production. However, the informal lenders, with their closer ties to individual farmers, were more successful in identifying those small-holders most likely to make the best use of the borrowed funds. Thus, although formal microcredit schemes do not impose the high administrative fees of traditional formal lending, they do not necessarily solve the problem of how to select successful borrowers.


Issue Date:
2008-01
Publication Type:
Working or Discussion Paper
DOI and Other Identifiers:
ISBN 978-1-84369-680-3 (Other)
PURL Identifier:
http://purl.umn.edu/37921
Total Pages:
21
Series Statement:
Discussion Paper
08-02




 Record created 2017-04-01, last modified 2017-08-25

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