Why Peasant Farmers Borrow

Interest rates are high in the rural credit markets of poor countries. Yet it is often said that the rates of return on capital invested in traditional inputs is low. Under these conditions it would seem uneconomic for farmers to borrow; if funds are needed, farmers should sell assets. If the expected costs are greater than the expected benefits, farmers will not have as much incentive to borrow money. Indeed, the evidence suggests that in poor countries most farmers are free of debt. But there is great diversity; some farmers do have high marginal returns on capital; some borrow at low rates; seasonality influences the debt structure, as does the level of wealth; and transactions costs may make borrowing cheaper than selling assets. Introducing uncertainty reduces the chances that farmers will borrow.