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Giving credit to the microlenders. Formal microlending, credit constraints and adverse selection: a case study of shrimp farmers in Bangladesh

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  • Andersson, Camilla I.M.
  • Holmgren, Erik
  • MacGregor, James
  • Stage, Jesper

Abstract

Smallholder farmers have long been denied access to formal credit, largely because of the high administrative fees associated with loans. A possible solution to this problem, which has become increasingly popular, is the use of microcredit financing, where innovative means of securing the loans, such as peer monitoring, are used. This paper examines the effectiveness of formal microcredit schemes as compared to the traditional informal credit sources in a rural shrimp farming district of Bangladesh. We compare the two types of credit by studying the technical and allocative efficiencies of the two groups of borrowers. The findings suggest that farmers using both types of microcredit have difficulty accessing credit, often over-utilising labour in order to reduce the need for inputs that require cash at the beginning of the season, creating inefficiencies in production. However, the informal lenders, with their closer ties to individual farmers, were more successful in identifying those small-holders most likely to make the best use of the borrowed funds. Thus, although formal microcredit schemes do not impose the high administrative fees of traditional formal lending, they do not necessarily solve the problem of how to select successful borrowers.

Suggested Citation

  • Andersson, Camilla I.M. & Holmgren, Erik & MacGregor, James & Stage, Jesper, 2008. "Giving credit to the microlenders. Formal microlending, credit constraints and adverse selection: a case study of shrimp farmers in Bangladesh," Discussion Papers 37921, International Institute for Environment and Development, Environmental Economics Programme.
  • Handle: RePEc:ags:iieddp:37921
    DOI: 10.22004/ag.econ.37921
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    Cited by:

    1. Al-Jarhi, Mabid, 2010. "Reviving the Ethics of Islamic Finance," MPRA Paper 66732, University Library of Munich, Germany, revised 2011.
    2. Abdul Wadud, 2013. "Impact of Microcredit on Agricultural Farm Performance and Food Security in Bangladesh," Working Papers 14, Institute of Microfinance (InM).

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