BORROWING COSTS AND THE DEMAND FOR RURAL CREDIT

The authors argue that high borrowing costs discourage many rural poor in low income countries from using formal loans. Borrowing costs are defined as nominal interest payments, plus borrower loan transaction costs, plus changes in the purchasing power of money. Farm level information from Bangladesh, Brazil and Colombia is presented to show that small borrowers incur substantially higher borrowing costs on formal loans than do large borrowers. It is suggested that higher nominal interest rates may induce lenders to reduce overall borrowing costs for the small and new borrower. © 1979, Taylor & Francis Group, LLC. All rights reserved.