The Conundrum of Successful Credit Projects in Floundering Rural Financial Markets

Abstract

Many governments use credit projects to foster agricultural development, and donors spend billions of dollars supporting these activities in low income countries (LICs). Most of these activities are justified by the purported impact that loans have on ultimate borrowers, for example, credit demands filled, additional crops produced, changes in modern inputs used, and borrowers' incomes increased. Most project evaluations report favorable impacts that, in turn, stimulate donors and governments to spend more money on agricultural credit. These favorable evaluations have prompted policymakers to conclude that rural financial markets are strengthened by most credit projects. At the same time, other researchers have evaluated rural financial markets in countries with successful credit projects and have found mounting problems. They report on markets that lose substantial portions of the purchasing power of their loan portfolios to ravages of default or inflation, concentrations of cheap loans in the hands of the wealthy, political meddling in lending, systems that offer few savings opportunities, large transaction costs for lenders and borrowers, lenders who are addicted to outside funds for their sustenance, and credit institutions that sporadically implode or self-destruct.' These reports of healthy parts but infirm wholes present a conundrum. How can the major parts of the rural financial system involved in donor and government projects be doing well while the system as a whole is doing poorly? Are these projects islands of tranquility in otherwise stormy seas? Or is one of these two approaches to evaluation giving an erroneous picture? Unfortunately, few credit project evaluations are published in journals or books, although a large number of these studies have been done. Typically, evaluation results are buried in unpublished reports or in graduate student theses. While millions of dollars have been spent