Linking Credit with other Markets: A Review of the Issues in Rural Economies

Abstract

This article uses the lens of information asymmetry and transaction costs to explore the problems of rural credit markets in less-developed countries. We show that in the absence of efficient markets in factor services, interlinked credit seems to provide a good solution to the typical problems of poor agrarian economies. These issues include seasonality, non-standard factor services, uncertain input supply, adverse price fluctuations, and the opportunistic behaviour of transacting agents. The article also postulates a theoretical model of interlinked credit with the output market as a direction of future research and makes few policy recommendations.

Keywords:

• rural credit
• interlinking
• informal sector
• rural economies

Acknowledgements

The author thanks both the anonymous referees and the Editor for their valuable comments which have led to substantial improvement of this article. He has immensely benefitted from conversations with Samar K. Datta on rural credit and interlinked transactions. He also acknowledges the doctoral fellowship extended by the Indian Institute of Management Ahmedabad.

Notes on contributor

Debdatta Pal is Assistant Professor in the area of Economics and Business Environment at Indian Institute of Management Raipur. He teaches microeconomics and microfinance. His current research interests include understanding rural credit market imperfections in an agricultural household framework, empirical assessment of varying access to institutional finance by the rural households, impact assessment of development initiatives, and choice modelling.

Notes

¹The term is attributed to Bottomley (1971).

²Loans for medical purposes cannot often be postponed, while those for production purposes can be kept on hold for a few days.