villagefinance

Krong Pailin, Cambodia. In the rainy season a 1-2 km trip can take much of the day.

Rural microcredit rates have risen sharply since the dawn of the microfinance revolution. Most modern rates range from 12-60% annually, with unsubsidized rates below 12% being extremely rare. The alternative for most poor borrowers is either no credit at all, or much higher informal rates.

At the dawn of the microfinance revolution, during the 1860s-90s, the Raiffeisen banks of rural Germany charged 5½% (per annum, declining balance) on small farmers’ loans, reaching 2 million households by 1914. The Italian casse rurali charged 6% at the end of the 19^th century. The caisses populaires of rural Quebec charged 7% in the 1900s-1940s.

What accounts for the difference between modern and historical rates?

Nobel economist Douglass North, analyzing the role of institutions in economic performance, writes: “The costliness of information is the key to the costs of transacting, which consist of the costs of measuring the valuable attributes of what is being exchanged and the costs of protecting rights and policing and enforcing agreements.” (Institutions, Institutional Change and Economic Performance, p. 27)

In modern microfinance urban people lend to rural people. Due to transaction costs, this is less efficient than the European model, in which villagers lent to their neighbours. However, the European model stumbled in many developing countries, as powerful villagers and government officials robbed ordinary villagers of insecure property rights.

In microfinance, we have paid too little attention to this transition. But learning from it is essential to charting a sustainable path out of rural poverty.