Development of Savings and Credit Institutions

The development of savings and credit institutions is an important policy for raising the productivity of smallholder agriculture in general, and is also important in facilitating the integration of crop and livestock production. Savings and credit institutions of various sorts allow farmers to make the necessary investments in livestock production and in the optimal use of livestock in crop production.

The literature on rural financial institutions is vast. General conclusions include the following:

- Finance is not necessarily the most important constraint to farmers, and improved financial institutions not necessarily a "magic bullet"
- Conventional credit institutions, both public and private, experience high hidden costs of lending to smallholders, especially poor smallholders, and especially where no collateral is available. In particular there are costs of gathering information about borrowers, which in many cases account for the apparently high interest rates charged by the private sector (moneylenders, crop traders etc.)
- Provision of credit at below market rates is unsustainable and may weaken existing credit institutions
- Group credit, where group members who already know each others’ creditworthiness stand collective surety for each others’ loans, may offer an alternative both to high-cost private credit and unsustainable public sector schemes.

Where credit institutions are concerned specifically with facilitating livestock purchase, special considerations apply:

- Loans for livestock present a relatively high risk of the entire investment being lost through death. Lenders who forgive loans in these circumstances create a moral hazard of false claims. Public-sector or non-profit agencies may be in a better position to manage this moral hazard.
- Credit institutions can incorporate some element of insurance, reflected in the cost of the loan
- Group schemes can be very effective in managing loans for livestock purchase
- Alternatively, traditional models of livestock loans within the community can be formalised and strengthened

Key References

van Dooren, P.J. 1983. Principles of Selected Credit Systems for Livestock Production and Development. ODI Pastoral Development Network Paper 16d

McIntire, J., Bourzat, D. and Pingali, P. 1992. Crop-Livestock Integration in Sub-Saharan Africa, Washington DC, World Bank.

Todd, H. 1998. Women climbing out of poverty through credit; or what do cows have to do with it? Livestock Research for Rural Development Vol.10, No.3 http://www.cipav.org.co/lrrd/lrrd10/3/todd103.htm

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