Abstract
This chapter examines the role of transactions costs, especially for the borrower, as a credit-rationing mechanism and demonstrates how these costs play an important role in the structure of financial markets in rural areas. The discussion is largely based on information from Bolivia, a country that has many small farmers and has received considerable foreign aid for credit programs. Several authors have explored the role of loan-transactions costs in credit rationing. These costs include the noninterest expenses incurred by both lenders and borrowers in making, servicing, and collecting loans. Lender transactions costs are assumed to be more or less constant, irrespective of loan size. Many lender procedures are aimed at gathering information about a prospective borrower. As demonstrated by the Bolivian case, when concessionary interest rates are present, lenders will rely heavily on transactions costs to ration credit.
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