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MPRA 2007-01: Do Small Farmers Borrow Less When the Lending Rate Increases? The Case of Rice Farming in the Philippines

This paper examines the relationship between an increase in lending rates and its impact on borrowing by poor farmers. The new generation of credit programs directed at small borrowers emphasizes financial sustainability. Based on anecdotal information, proponents of cost recovery claim that raising formal lending rates would have minimal impact on borrowing. The paper states that rigorous evidence for this conjecture is sparse. It conducts an econometric test using data from a survey of small rice farmers from the Philippines. Study findings include: * Increasing effective lending rate has a negative and statistically significant effect on the demand for credit, contrary to the conjecture; * Demand response must be an important consideration in designing the interest rate policy of financial institutions serving small borrowers. The paper offers the following conclusions: * Demand response alone is insufficient to derive recommendations on interest rate and insurance premium policies; * Supply side of formal lending should also be examined in terms of cost, sustainability and the welfare loss from subsidizing production loans; * Borrowing response should be a serious concern in designing cost recovery policies for rural finance.

PinoyME Foundation
Authors Keywords
Briones, Roehlano M.; microfinance; credit; lending;
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Published in 2007 and available in the MPRA or can be downloaded as full text Downloaded 694 times since November 25, 2011