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Interest Rates Outside the Organized Money Markets of Underdeveloped Countries

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1957
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IN AN EARLIER STUDY1 an examination was made of the interest rate structure and the lending practices of organized money markets in underdeveloped countries, and it was shown that these differed much less than might have been expected from those prevailing in most developed countries. In underdeveloped countries, however, unorganized money markets also play a very important role, and any study of credit conditions in these countries that is to be adequate must be extended to cover the unorganized as well as the organized markets. Efforts have often been made to repair the deficiencies of the unorganized markets by government action designed to stimulate the development of cooperative credit or to provide credit through agricultural banks, etc.; it is convenient to include these government-sponsored institutions in a study of unorganized money markets in general.

Interest rates in the unorganized money markets of underdeveloped countries are generally very high in relation both to those in the organized money markets and to what is needed for rapid economic development. These high interest rates are caused by a disproportionately large demand for loanable funds coupled with a generally inelastic and limited supply of funds. The large demand stems from the special social and economic factors prevalent in the rural areas of underdeveloped countries. The low level of income leaves little surplus for saving and for the accumulation of capital for self-financing of agricultural and handicraft production. The uncertainty of the weather, which affects crop yields and incomes, causes an additional need for outside funds in bad years. A significant portion of the demand for loanable funds in rural areas is for financing consumption at levels much higher than are warranted by the low income of the peasant. These standards of consumption have been influenced by reasons of prestige and custom; for example, the large expenditures needed for marriages, religious festivals, funerals, etc., are on a socially prescribed minimum standard above the reach of the average peasant.2

The supply of loanable funds in the unorganized money markets is very limited and inelastic because the major source is the moneylender, and only very small quantities are supplied by indigenous bankers and organized institutions, such as cooperative credit societies and land mortgage banks. The moneylender in most cases is also a merchant or a landlord and therefore is willing to lend only at rates comparable with what he could earn by employing his capital in alternative uses which are often highly profitable. The lenders in the unorganized money markets do not have the facilities for mobilizing liquid funds available to commercial banks in organized markets and therefore the supply of funds is rather inflexible. Since the unorganized money markets are generally not closely connected with the organized money markets, there is little possibility of increasing the supply of loanable funds beyond the savings of the lending sector of the unorganized money markets. The limited supply of loanable funds indeed reflects the general shortage of capital in underdeveloped countries.

The disadvantages of the high rates of interest in the unorganized money markets are well known and include such important effects as “dead-weight” agricultural indebtedness, alienation of land from agriculturists to moneylenders and the agrarian unrest that is thus engendered, and a general slowing down of economic development. This paper is concerned mainly not with these problems, but with the nature of the unorganized money markets, the structure and pattern of interest rates prevailing therein, the connection between unorganized and organized money markets, and the implications of such institutional factors for the formulation of monetary policy in underdeveloped countries. Attention is also given to governmental efforts to reduce interest rates in unorganized money markets.

Nature and Size of the Unorganized Money Markets

The organized money markets in underdeveloped countries are less fully integrated than the money markets in developed countries. The unorganized money markets in underdeveloped countries are even more imperfect, and indeed it is questionable whether the existing arrangements should be referred to as “markets.” They are much less homogeneous than the organized markets and are generally scattered over the rural sector. There is very little contact between the lenders and borrowers in different localities. The usual textbook conditions for a perfect market are completely nonexistent: lenders and borrowers do not know the rates at which loans are being transacted in other parts of the country; the relationship between borrower and lender is not only that of a debtor and creditor but is also an integral part of a much wider socioeconomic pattern of village life and rural conditions.

In unorganized money markets, moreover, loans are often contracted and paid for not in money but in commodities; and the size of the average loan is very much smaller than in the organized money markets. Both borrowers and lenders in the two markets are often of quite different types. In the organized money markets, the borrowers are mainly traders (wholesale and retail) operating in the large cities and, to a less extent, manufacturers. Agriculturalists rarely account for a significant portion of demand except in those underdeveloped countries where export agriculture has been developed through plantations or estates. In the unorganized money markets, the borrowers are small agriculturalists, cottage industry workers, and some retail shopkeepers. The lenders in the organized money markets consist almost exclusively of commercial banks. In the unorganized markets, the suppliers of credit consist of a few financial institutions, such as cooperatives, private and government-sponsored agricultural banks, indigenous bankers, professional moneylenders, large traders, landlords, shopkeepers, relatives, and friends. Proper records of loans granted or repaid are usually not kept, and uniform accounting procedures are not adopted by the different lenders. Loans are granted more on a personal basis than in the organized money markets,3 and most of the loans granted by the moneylenders and by other noninstitutional sources are unsecured beyond the verbal promise of the borrower to repay.

The unorganized money market may be divided into three major parts: (1) a part in which the supply is dominated by indigenous bankers, cooperatives, and other institutions, and the demand by rural traders and medium-sized landlords; (2) a part in which the demand originates mainly from small agriculturists with good credit ratings, who are able to obtain a large portion of their funds from respectable moneylenders, traders, and landlords at high but reasonable rates of interest, i.e., rates that are high in relation to those prevailing in the organized money market but not exorbitant by the standards of the unorganized money market; (3) a part in which the demand originates from borrowers who are not good credit risks, who do not have suitable collateral, and who in consequence are driven to shady marginal lenders who charge exorbitant rates of interest.

The dividing line between the second and third parts of the market is rather narrow, mainly because the same borrowers and lenders may operate in both parts. For example, a professional moneylender may charge reasonable rates of interest to an agriculturist who is a good credit risk and has suitable collateral to offer; at the same time, he may not hesitate to use a portion of his funds to lend at very high rates of interest and thus operate as a loan shark. Similarly, a borrower who can satisfy most of his financial needs in the second part of the market may approach a loan shark for marginal borrowing, especially in times of emergency. Most often, however, it is probably the borrower rather than the lender who operates in both the second and third parts of the market.

Unorganized money markets are located mainly in rural areas and therefore the demand for and supply of loanable funds originate mainly from the agricultural sector. Parts of the markets, however, are to be found in urban areas. Moneylenders are known to operate in the cities for financing small business units and some consumer expenditures. Pawnshops also operate mainly in urban areas, and such credit institutions belong to the unorganized rather than to the organized money markets.

The fact that unorganized money markets cater mainly to the financial needs of the agricultural sector, which is of greater importance in an underdeveloped country than in a developed country, justifies the conclusion that the relative importance of the unorganized money market is probably much greater in underdeveloped than in developed countries. In many of the developed countries of Western Europe, the share of national income originating in agriculture is only about 15–20 per cent and in the United Kingdom and the United States it is between 5 per cent and 10 per cent. In the underdeveloped countries, agriculture ordinarily accounts for about half of national income, and some two thirds to three fourths of the total population is commonly dependent on agriculture.

The relative size of the unorganized money markets may be roughly estimated by comparing the value of agricultural4 or rural indebtedness outstanding with the claims of the banking system on the private sector. Data for making such a comparison sufficiently reliable to permit more than a rough approximation are available for only a few countries.5 For all of these countries except Ceylon, however, it is significant that agricultural or rural indebtedness exceeds the claims of the banking system on the private sector of the economy, a fact which suggests that in these countries the unorganized money markets are more important than the organized.

A comparison of agricultural or rural indebtedness with currency in circulation gives a rough indication of the extent to which the unorganized money markets have developed in relation to their potentialities. The assumptions here are that, other things remaining the same, the currency in circulation within a country increases (1) with economic growth and (2) as the agricultural sector becomes more monetized. The second assumption, in other words, is that a country having a large subsistence economy would use very little currency, while another country having only a small subsistence economy would tend to have a larger amount of currency in circulation. Having a monetized agricultural or rural sector, however, does not necessarily mean that debt and credit are developed. Therefore, the amount of agricultural or rural indebtedness in relation to the amount of currency in circulation gives a rough approximation of the extent to which the unorganized money market has developed.

A comparison of agricultural or rural indebtedness with agricultural income and national income probably gives an indication of whether such indebtedness is too large or too small. In agriculture, as in other sectors, the borrower in the unorganized money market may suffer (and has suffered) both from having too much credit and from having too little. Generally speaking, in a number of underdeveloped countries, such as Burma, India, and Mexico, the volume of agricultural indebtedness before the great depression of 1929 was rather large and had been expanding fairly rapidly. This rapid expansion was brought about by a fairly long period of rising prices of agricultural products. The large amount of indebtedness was not a serious handicap when agricultural incomes were rising, but a severe blow was dealt to the agriculturist when agricultural prices fell more than prices of industrial products in the thirties. The amount of credit available in the unorganized money market generally declined, and it might be said that in the thirties the agriculturists in underdeveloped countries suffered from having too little credit. The postwar years have seen some expansion of agricultural credit in many countries, but it is doubtful whether the actual volume has reached the level that existed in most countries before the great depression. Thus, for example, it has been estimated for Cyprus that the volume of agricultural indebtedness in 1952 was only about one half that of 1928. For other countries, such as Burma, India, and Thailand, the situation seems to be similar to that of Cyprus. In Ceylon in 1950 nearly 70 per cent of the farmers were free from debt, while in 1936–38 this was true of only 25 per cent.

In attempting to estimate the desirable volume of rural indebtedness, it should be borne in mind that there is hardly one among the developed countries, where credit is utilized to a large extent, in which the claims of the banking system on the private sector are larger than half the national income, and that for most countries these claims equal between 25 and 50 per cent of national income.6 The desirable amount of indebtedness for agriculturists depends on many factors—the most important being the productivity of borrowed capital, the rate of interest, and the time period of the loan. As the turnover of capital in agriculture is much slower than in industry, and interest rates in the unorganized money markets of underdeveloped countries tend to be high and must inevitably be higher than in the organized money markets, it may be concluded that any volume of rural indebtedness that exceeds 50 per cent of income originating from the agricultural sector is too much. On the other hand, since borrowers in the organized money markets typically have greater capacity for self-finance, rural indebtedness between 25 and 50 per cent of agricultural income may be reasonable. Indebtedness below one fourth of agricultural income is probably too little, and credit less than 10 or 15 per cent of income seems definitely inadequate. These estimates refer to current debt for productive purposes.

Sources of Credit

The supply of credit in the unorganized money markets comes from noninstitutional sources, i.e., from individuals who are either professional moneylenders or landlords, relatives, or friends of the borrowers, as well as from institutions, such as cooperative banks, agricultural banks, and the government. For many countries no data are available, but the record of the countries listed in Table 1 suggests that noninstitutional sources are much more important than institutional sources in the supply of agricultural or rural credit in underdeveloped countries. This is not surprising because even in the United States, a highly developed country, it has been estimated that over 40 per cent of agricultural credit is supplied from noninstitutional sources. In Japan only about half the total supply comes from noninstitutional sources, since the financial structure is well developed. The statistics for Ceylon in Table 1 may be subject to some error, because different sources have been combined; but Ceylon’s low percentage of noninstitutional credit is partly explained by the fact that its financial structure is more highly developed than that of most underdeveloped countries.

Table 1.Sources of Agricultural Credit1(In per cent of total)
Ceylon (Fiscal 1950–51)India (Fiscal 1951–52)Japan (1950)Pakistan 2 (1951)Thailand (Fiscal 1952–53)United States (1952)
Institutional sources46749161658
Commercial banks8 31
330
Cooperatives7 4313165 10
Government and government-owned institutions315345831411
Other71771912
Noninstitutional sources549351 9848442
Professional moneylenders5070120
Traders and shonkeepers
6317
Landlords4 62171
Relatives, friends, and others166346

Some of the classifications in the publications from which the data have been compiled differ significantly from those adopted in this table. For Ceylon and Pakistan, rural credit data are used. In some cases, the components do not add up to 100 because of rounding.

Supply of credit to the rural sector in the Punjab only.

Data relate to the end of 1950.

Loans owed by individuals to credit (limited and unlimited), thrift, and land mortgage cooperative societies at the primary level at the end of April 1951.

Agricultural loans outstanding of the State Mortgage Bank and the Agricultural and Industrial Credit Corporation (estimated from total loans outstanding and the ratio of loans to agriculture to total loans during 1947/48–1950/51) at September 1951.

A residual item and therefore subject to considerable error.

Estimated from the residual item “others,” in the publication from which the figure was derived, by applying the ratio of known institutional to noninstitutional credit.

The sum of credit supplied by cooperative associations and mutual loan associations.

The sum of credit supplied by merchants and private individuals plus the estimated portion of the residual item “others” (2.4 per cent) given in the publication cited below.

Credit supplied by Production Credit Associations, which includes discounts at Federal Intermediate Credit Banks of agricultural credit corporations and livestock loan companies.

Credit supplied by the Farmers Home Administration.

The sum of credit supplied by life insurance companies and Federal Land Banks. Statistics of Federal Land Banks include the Federal Farm Mortgage Corporation.

Some of the classifications in the publications from which the data have been compiled differ significantly from those adopted in this table. For Ceylon and Pakistan, rural credit data are used. In some cases, the components do not add up to 100 because of rounding.

Supply of credit to the rural sector in the Punjab only.

Data relate to the end of 1950.

Loans owed by individuals to credit (limited and unlimited), thrift, and land mortgage cooperative societies at the primary level at the end of April 1951.

Agricultural loans outstanding of the State Mortgage Bank and the Agricultural and Industrial Credit Corporation (estimated from total loans outstanding and the ratio of loans to agriculture to total loans during 1947/48–1950/51) at September 1951.

A residual item and therefore subject to considerable error.

Estimated from the residual item “others,” in the publication from which the figure was derived, by applying the ratio of known institutional to noninstitutional credit.

The sum of credit supplied by cooperative associations and mutual loan associations.

The sum of credit supplied by merchants and private individuals plus the estimated portion of the residual item “others” (2.4 per cent) given in the publication cited below.

Credit supplied by Production Credit Associations, which includes discounts at Federal Intermediate Credit Banks of agricultural credit corporations and livestock loan companies.

Credit supplied by the Farmers Home Administration.

The sum of credit supplied by life insurance companies and Federal Land Banks. Statistics of Federal Land Banks include the Federal Farm Mortgage Corporation.

For other countries, the relative importance of institutional credit in the unorganized market may be estimated by an indirect method based on a number of alternative hypotheses. The detailed results of these estimates are shown in Table 9 (Appendix). On any of the hypotheses examined, the importance of institutional credit is seen to be rather small in many underdeveloped countries.

In addition to the traditional sources of credit in the unorganized money markets, a new source has been opened to countries receiving aid from the United States in postwar years through the creation of counterpart funds. In many countries, these funds have been utilized for direct loans to agriculturists or for creating new financial institutions to operate within the unorganized sector. In Japan, counterpart funds have been used to extend long-term loans to agriculture, forestry, and fisheries, in addition to industry; but the loans to agriculture have been rather small. In the Philippines, counterpart funds have been used by the Rehabilitation Finance Corporation to purchase shares and to grant loans to the newly established rural banks. In Indonesia, the Apex Cooperative Bank has been established with a capital of Rp 100 million provided from counterpart funds. In Iran, part of the capital of the Development Bank originated from U.S. aid funds.

Generally speaking, however, foreign capital from governmental sources such as these was not available before the war to supplement the supply of loanable funds in the unorganized money market, although there have been instances of private foreign capital entering local unorganized money markets. For example, before the great depression the Chettiars of India financed a significant portion of agricultural production in Burma, Ceylon, Indo-China, Malaya, and Thailand.

Sources of Data, by Country

Ceylon. Department of Census and Statistics, Final Report on the Economic Survey of Rural Ceylon, 1950–51 (Colombo, 1954), and Statistical Abstract of Ceylon, 1951 (Colombo, 1951), p. 284; Cooperative Department, Administration Report on the Working of Cooperative Societies, 1950–51 (Colombo, 1951), Appendix B.

India. Reserve Bank of India, All-India Rural Credit Survey (Bombay, 1954), Vol. 2, p. 167.

Japan. Hideo Tokoro, “Agricultural Credit in Japan,” International Conference on Agricultural and Cooperative Credit, University of California, 1952, Proceedings (Berkeley, Calif., 1952), Vol. 2, p. 849.

Pakistan. Board of Economic Inquiry, Punjab, Report on the Need and Supply of Credit in the Rural Areas of the Punjab: Inquiry Conducted by Hassan Ali Syed (Lahore, 1951).

Thailand. Ministry of Agriculture, Thailand Economic Farm Survey, 1953 (Bangkok, 1953).

United States. Norman J. Wall, “Mobilizing Capital for Agriculture in the United States,” Economic Commission for Asia and the Far East, Mobilization of Domestic Capital: Report and Documents of the Second Working Party of Experts (Bangkok, 1953), p. 248.

Noninstitutional sources

The classification in Table 1 of noninstitutional sources into professional moneylenders, traders and shopkeepers, landlords, and relatives, friends, and others is arbitrary insofar as many individuals could belong to more than one of the categories listed. In the rural surveys conducted in India, Pakistan, and Thailand, the classification, though not identical with the one adopted in Table 1, was according to the major occupation of the lender. The reports of these surveys confirm the general impression that in the unorganized money markets there are many persons other than professional moneylenders who lend money at interest. However, the extremely low proportion of credit reported as supplied by professional moneylenders in the Punjab is the result of special circumstances; after partition, the Hindu moneylenders fled to India and were replaced by local people not yet classified as moneylenders.

There are many reasons why noninstitutional sources should provide more credit than institutional sources. The most important is that the existing financial institutions tend to restrict their lending activities mainly to urban areas and do not generally wish to engage in the more risky field of lending to the agricultural sector. Also, those in the rural sector who wish to borrow money prefer to use noninstitutional sources of credit despite the fact that the interest rates are much higher than rates on loans from institutions. This preference is due to a number of factors. The institutions are usually at a considerable distance from the borrowers, while moneylenders are available in every village. Borrowers obtain their loans more promptly from noninstitutional sources. Noninstitutional sources do not insist on punctual repayment as banks or cooperative societies do. Usually it is possible to obtain loans for such purposes as marriage and litigation only from noninstitutional sources. There is no publicity on the amount of money borrowed from noninstitutional lenders. There are generally no intricate and complicated rules governing the granting of loans by the village moneylenders. And noninstitutional sources are willing to lend money more freely without collateral and on the borrower’s mere promise to repay. The absence of a collateral requirement is especially important, since the majority of the potential borrowers in the unorganized money market have very little in the way of financial or physical assets.

Supply of institutional credit

Cooperative societies—one of the major sources of institutional credit—were established in many countries in Asia and in certain colonial territories much earlier than in Latin America or the Middle East; accordingly, in these territories, they are generally much more important than other sources of institutional credit. In Latin America and in some of the Middle Eastern countries, a considerable volume of agricultural credit has been supplied by governments, either directly or through special credit institutions wholly or partly government owned.

Commercial banks have been an important source of agricultural credit in a number of Latin American countries, partly because of the nature of banking development in that region and partly because selective credit controls have been used by many central banks to redirect the flow of credit toward the agricultural sector. In Asia and the Middle East, commercial banks have generally supplied very little, if any, credit to agriculture.

Cooperatives. Cooperative credit societies may generally be regarded as belonging to the unorganized sector because most of them operate in rural areas for financing agriculture. In Pakistan, however, many cooperative credit societies in recent years have begun to perform commercial banking functions7 and therefore partly belong to the organized money market. Consumer credit societies are of little or no significance in most underdeveloped countries and even when they are found in urban areas may be rightly classified as part of the unorganized money market.

Both the limited and the unlimited liability type of cooperative credit society are common in underdeveloped countries. The primary cooperative credit societies usually combine to form central cooperative banks, and these in turn combine to form an apex cooperative bank. The apex institution performs basically the function of a bankers’ bank to the cooperative movement as a whole, obtaining funds mainly from the government and partly from the movement itself.

Even in countries where they have been successfully introduced, cooperatives have had a number of shortcomings. The supply of credit made available by them has usually been inadequate, especially in relation to medium-term and long-term needs. Thus, for example, in Ceylon where the cooperative movement supplied 7 per cent of total rural credit in 1951, the annual report on cooperative societies for 1954 stated that “after 43 years of activity the Ceylon Movement can be said to have touched the bare fringe of the whole problem.… Our Credit Societies are making much headway over short-term loans, but adequate facilities for medium- and long-term loans are a crying need.…”8 In other countries, such as Thailand and the colonial territories in the Caribbean, dissatisfaction has often been expressed that the cooperative movement, though useful as a means for channeling government funds to the agricultural sector, has not been of importance in the mobilization of domestic capital.

It is characteristic of the cooperative movement in most underdeveloped countries that cooperative societies tend to flourish when agriculture is booming and the terms of trade for agriculture are good. But whenever agricultural incomes fall, the movement suffers a setback, and more often than not the gains achieved in the good years are wiped out. The great depression beginning in 1929 dealt a severe blow to the cooperative movement, which had already been faltering under the weight of deteriorating terms of trade for agricultural products in the twenties. The movement received government financial help before the war; and in postwar years it was stimulated by the generally favorable terms of trade for agriculture. With the prospect of considerable government assistance in the future, as in India, the movement may be able to weather future depressions.

Another characteristic is that, even in the most favorable periods and in the most successful countries, the cooperative movement has been an important source only for financing crop loans, that is, for short-term credit. Medium-term and long-term finance have been exceptions. In a few areas in India, some long-term finance has been supplied by cooperative mortgage banks. Some of the terms and conditions of loans granted by cooperative societies are tabulated in Table 10.

Table 2.Regional Variations in Interest Rates Charged by Registered Pawnbrokers and Moneylenders in Ceylon, 19511(In per cent per annum)
ProvincesPawnbrokers’ RatesMoneylenders’ Rates
Western17.919.7
Central23.917.3
Southern19.813.2
Northern37.526.8
Eastern30.412.3
Northwestern19.410.6
North Central45.836.4
Uva22.314.5
Sabaragamuwa19.320.8
Weighted average rate22.918.5
Weighted average rate of pawnbrokers and moneylenders20.2
Source: Department of Census and Statistics, Census of Financial Institutions, 1952 (Colombo, 1954).

Interest earned during the year expressed as percentage of advances outstanding at the end of the year.

Source: Department of Census and Statistics, Census of Financial Institutions, 1952 (Colombo, 1954).

Interest earned during the year expressed as percentage of advances outstanding at the end of the year.

Table 3.Structure of Interest Rates in the Unorganized Money Market in Thailand, by Regions and Sources of Supply, Fiscal Year 1952–53(In per cent per annum)
Source of FundsEntire CountryCentral Plain 1SoutheastNortheastNorthWest and Southwest 2South
Cooperative societies8.549.258.007.878.67n.a.38.05
Unspecified (others)17.9122.76n.a.3n.a.35.005.00n.a.3
Relatives18.2919.467.2522.097.250.147.18
Merchants or buyers25.6420.62n.a.356.2715.002.0018.25
Village shopkeepers28.2421.5218.0064.2231.6017.1425.07
Moneylenders30.9032.5228.0022.0824.0044.0018.24
Landlords44.7035.79n.a.391.885.00n.a.35.00
Weighted average421.1322.1511.2017.2617.743.6111.33
Source: Ministry of Agriculture, Thailand Economic Farm Survey, 1953 (Bangkok, 1953).

Predominantly rice-growing areas.

Mining and timber areas.

Not applicable because no loans were taken.

Based on the percentage of borrowers and the average size of loan from each source.

Source: Ministry of Agriculture, Thailand Economic Farm Survey, 1953 (Bangkok, 1953).

Predominantly rice-growing areas.

Mining and timber areas.

Not applicable because no loans were taken.

Based on the percentage of borrowers and the average size of loan from each source.

Table 4.Variations in Interest Rates in the Unorganized Money Market in India, According to Type of Region, Fiscal Year 1951–52
Number of Districts
Level of Interest Rates 1SubsistenceMonetizedCommercialized and monetized
Very high1050
High942
Medium753
Low168
Very low087
Source: Reserve Bank of India, All-India Rural Credit Survey (Bombay, 1954), Vol. 2, pp. 190–93.

The level is determined by the proportion of borrowing (excluding borrowing at unspecified rates of interest) at rates of 18 per cent or more to the total borrowing from the principal private credit agencies. Very high level is where the proportion is 93.7 per cent, high is 77.0 per cent, medium is 54.3 per cent, low is 23.4 per cent, and very low is 3.9 per cent.

Source: Reserve Bank of India, All-India Rural Credit Survey (Bombay, 1954), Vol. 2, pp. 190–93.

The level is determined by the proportion of borrowing (excluding borrowing at unspecified rates of interest) at rates of 18 per cent or more to the total borrowing from the principal private credit agencies. Very high level is where the proportion is 93.7 per cent, high is 77.0 per cent, medium is 54.3 per cent, low is 23.4 per cent, and very low is 3.9 per cent.

Table 5.Estimates of Interest Rates That Lenders Would Have to Charge to Compensate for Defaults1(In per cent per annum)
Value of

Defaults as

Percentage

of Total

Loans
Normal Interest Rate in Absence of Defaults
12510152550
12.023.036.0611.1116.1626.2651.52
23.064.087.1412.2417.3527.5553.06
56.327.3710.5315.7921.0531.5857.89
1012.2213.3316.6722.2227.7838.8966.67
1518.8220.0023.5229.4135.2947.0676.47
2534.6736.0040.0046.6753.3366.67100.00
50102.00104.00110.00120.00130.00150.00200.00

For description of table, see text.

For description of table, see text.

Table 6.Estimates of Maximum Rates of Interest That Borrower May Be Willing to Pay1(In per cent per annum)
Borrowed

Money as

Percentage

of Total

Capital

or Outlay
Productivity of Captial (Total Outlay) in Per cent Per Annum
100908070605040302010531
100100908070605040302010531
901111008978675644332211.15.63.31.1
8012511310088756350382512.56.33.81.3
70143129114100867157432914.37.14.31.4
601671501331171008367503316.78.351.7
50200180160140120100806040201062
4025022520017515012510075502512.57.52.5
303333002672332001671331006733.316.7103.3
205004504003503002502001501005025155
101,000900800700600500400300200100503010
52,0001,8001,6001,4001,2001,0008006004002001006020
33,3383,0002,6672,3332,0001,6671,3331,00066733316710033
110,0009,0008,0007,0006,0005,0004,0003,0002,0001,000500300100

For description of table, see text.

For description of table, see text.

Table 7.Estimates of Rate of Growth of Institutional Credit Required to Meet Various Objectives1

(Compound rate in per cent per annum)2

Present Level of Institutional Credit as Per Cent of Total CreditInstitutional Credit to Expand in 20 YearsInstitutional Credit to Expand in 10 Years
To reach 50 per cent of Total creditTo reach 75 per cent of Total creditTo reach 50 per cent of Total creditTo reach 75 per cent of Total credit
123.726.250.656.8
317.119.534.940.5
514.216.428.233.5
1010.212.519.624.6
206.58.511.616.3
255.37.49.213.7

For description of table, see text.

On the assumptions that the need for total credit increases by a simple rate of 2 per cent per year and the availability of noninstitutional credit does not change but it is replaced by institutional credit when total supply exceeds demand.

For description of table, see text.

On the assumptions that the need for total credit increases by a simple rate of 2 per cent per year and the availability of noninstitutional credit does not change but it is replaced by institutional credit when total supply exceeds demand.

Table 8.Indicators of the Relative Ssize of the Unorganized Money Market1
Agricultural or Rural Indebtedness
As Per Cent of
Country and Currency UnitYear2Value3 (million currency units)Claims of banking system on private sector4Currency in circulation4Income originating in agricultural sector 5National income
Brazil
(cruzeiro)195114,0481549166
Burma (kyat)193075013776
Cambodia (riel)195250049
Ceylon19514725131
(rupee)1950–519451252
Colombia (peso)19524404373167
Cyprus
(Cyprus pound)1952554809
El Salvador (coldn)1944–481302772483920
India1929–309,00050835710957
(rupee)1951–5220,0003361714121
Japan (yen)19304,5005620521543
Jordan (dinar)1952210
Lebanon1951–52276781355025
(Lebanese pound)19536518316
Mexico (peso)195011,50047339515431
Pakistan19511,0071104396
(rupee)19511,12812348106
Syria
(Syrian pound)195280373296
Thailand1934–3510029692312
(baht)1952–532,05914356148
Turkey (lira)19522,000811568216

Notes describing the data and the sources from which the data have been drawn are given below in the section, “Descriptive Notes and Sources of Data, by Country.”

Estimates for more than one year for a country are in general not comparable, since the data are drawn from different sources.

Rural indebtedness has been used for Brazil, Ceylon, India (1929–30), and Thailand (1952–53). For other countries, data relate to agricultural indebtedness, except that for Pakistan estimates based on both agricultural and rural indebtedness have been made. See text, footnote 4.

End-of-year figures. For Cyprus, India (1929–30), Lebanon (1953), and Syria, only loans and advances are included in claims of the banking system.

Including livestock production, forestry, and fisheries.

Notes describing the data and the sources from which the data have been drawn are given below in the section, “Descriptive Notes and Sources of Data, by Country.”

Estimates for more than one year for a country are in general not comparable, since the data are drawn from different sources.

Rural indebtedness has been used for Brazil, Ceylon, India (1929–30), and Thailand (1952–53). For other countries, data relate to agricultural indebtedness, except that for Pakistan estimates based on both agricultural and rural indebtedness have been made. See text, footnote 4.

End-of-year figures. For Cyprus, India (1929–30), Lebanon (1953), and Syria, only loans and advances are included in claims of the banking system.

Including livestock production, forestry, and fisheries.

Table 9.Indicators of the Link Between Organized and Unorganized Money Markets
Recorded Institutional Credit to Agricultural Banks 1
As Per Cent of
Country and Currency UnitEnd of YearValue (million currency units) 2Income origination from agriculture 3Currency in circulationTotal supply of credit in inorganized marketCommercial Banks’ Credit to Agriculture as Per Cent of Their Total Credit to Private Sector
(1) 4(2) 5(3) 6
ASIA
Burma194836.92.111.014523.9
(kyat)195250.22.712.218731.5
1953102.45.120.0341351.9
195485.34.314.6291140.3
Ceylon194814.96.25.0
(rupee)195166.717.4
195395.227.9
1954106.630.5
Indonesia1952415.70.99.5621
(rupiah)1953604.111.614.5
1954617.48.213.9
Pakistan195319.80.20.91n.a 7n.a 72.9
(rupee)195418.00.81.9
Philippines1950174.87.026.14718734.4
(peso)1952299.310.746.571271140.5
1954370.411.554.476291238.2
1955377.055.136.3
Thailand194866.20.83.04n.a.7n.a.7
(baht)194996.70.74.15n.a.7n.a.70.7
1950106.80.73.55n.a.7n.a.70.7
LATIN AMERICA
Bolivia1948268.112.911.9
(boliviano)1952416.46.96.8
1953473.64.16.4
Brazil195110.913.038.68733138.2
(cruzeiro ;195214.014.544.39736158.7
billions)195316.714.644.09736168.7
195420.513.741.29134148.9
Colombia1948167.14.619.471271116.8
(peso)1953470.86.229.0n.a.7381521.9
1954651.77.636.9n.a.7451824.8
Costa Rica195062.9
(colόn)195276.460.9
195380.458.3
195485.955.3
Cuba195136.917.715.4
(peso)195236.815.515.6
195317.07.516.0
195427.411.213.3
Dominican195343.9152.42.1
Republic195417.855.02.4
(peso)195531.983.42.3
Ecuador1948165.748.05.0
(sucre)1952208.17.340.5491871.6
1953226.27.641.1511982.2
1954244.97.338.3491872.8
El Salvador195260.367.4
(colόn)195341.646.0
195460.862.4
1955119.2131.6
Guatemala19498.34.322.129114
(quetzal)195210.74.223.628114
195313,05.124.434135
195419.17.335.449187
Honduras19545.11.713.111425.7
(lempira)19558.32.624.817638.6
Mexico19532.625.566.1n.a. 764267.3
(peso;19542.924.462.3n.a.761246.2
billions)19553.28.8
Nicaragua194959.8104.5
(cbrdoba)1953162.3146.0
1954235.5185.7
1955273.7220.5
Panama19520.60.64215.2
(balboa)19530.65.2
19540.85.5
19551.67.0
Paraguay1952173.78.848.55922943.4
(guarani)1953280.88.958.75922938.3
1954409.7
Peru1948223.16.626.75220816.0
(sol)1952466.46.423.05019713.7
1953614.47.735.064241014.9
19551,093.716.3
Venezuela194838.54.9
(bollvar)1952108.212.1
1953141.915.4
1954155.9
MIDDLE EAST
Egypt (Egyptian pound)1949–5021.27.611.251198
Iran (rial)1951561.68.2
Iraq19480.82.3
(dinar)19521.13.7
19542.25.3
Lebanon19487.34.43.929114
(Lebanese19504.42.52.21663
pound)19526.22.33.01662
Syria195331.47.8
(Syrian pound)195448.37.8

Except as otherwise indicated in the section, “Descriptive Notes and Sources of Data, by Area,” below, the value of recorded institutional credit to agriculture refers to outstanding loans of the central bank, commercial banks, cooperatives, and other credit institutions. The coverage is fairly complete for most of the countries included in the table, with the exception of Colombia, Costa Rica, Cuba, the Dominican Republic, El Salvador, Iraq, Pakistan, and Venezuela.

There are certain discrepancies between the figures in this table and those recorded in the Report of the Center on Agricultural Financing and Credit for Asia and the Far East, Lahore, 1–13 October 1956 (Food and Agriculture Organization, Rome, February 1957), Table IV, which became available only after the preparation of the present paper had been completed. The discrepancies are to be explained in terms of differences in coverage and in the sources from which the figures have been drawn.

Billion currency units for Brazil and Mexico.

For Brazil, Colombia, Ecuador, Guatemala, Honduras, Mexico, Panama, Egypt, and Lebanon, income originating from agriculture was estimated from the relation of such income to total national income during an earlier period. For details, see section, “Descriptive Notes and Sources of Data, by Area,” below.

On the assumption that the total supply of credit is equal to 15 per cent of income originating from agriculture.

On the assumption that the total supply of credit is equal to 40 per cent of income originating from agriculture.

On the assumption that the total supply of credit is equal to 100 per cent of income originating from agriculture.

Not applicable because the recorded supply of institutional credit to agriculture would be greater than the total supply of credit under this assumption. In Pakistan and Thailand, the inapplicability arises from the conclusion established in Table 8 that the total supply of credit (size of unorganized money market) was 10 per cent and 14 per cent, respectively, of income originating from agriculture.

Except as otherwise indicated in the section, “Descriptive Notes and Sources of Data, by Area,” below, the value of recorded institutional credit to agriculture refers to outstanding loans of the central bank, commercial banks, cooperatives, and other credit institutions. The coverage is fairly complete for most of the countries included in the table, with the exception of Colombia, Costa Rica, Cuba, the Dominican Republic, El Salvador, Iraq, Pakistan, and Venezuela.

There are certain discrepancies between the figures in this table and those recorded in the Report of the Center on Agricultural Financing and Credit for Asia and the Far East, Lahore, 1–13 October 1956 (Food and Agriculture Organization, Rome, February 1957), Table IV, which became available only after the preparation of the present paper had been completed. The discrepancies are to be explained in terms of differences in coverage and in the sources from which the figures have been drawn.

Billion currency units for Brazil and Mexico.

For Brazil, Colombia, Ecuador, Guatemala, Honduras, Mexico, Panama, Egypt, and Lebanon, income originating from agriculture was estimated from the relation of such income to total national income during an earlier period. For details, see section, “Descriptive Notes and Sources of Data, by Area,” below.

On the assumption that the total supply of credit is equal to 15 per cent of income originating from agriculture.

On the assumption that the total supply of credit is equal to 40 per cent of income originating from agriculture.

On the assumption that the total supply of credit is equal to 100 per cent of income originating from agriculture.

Not applicable because the recorded supply of institutional credit to agriculture would be greater than the total supply of credit under this assumption. In Pakistan and Thailand, the inapplicability arises from the conclusion established in Table 8 that the total supply of credit (size of unorganized money market) was 10 per cent and 14 per cent, respectively, of income originating from agriculture.

Table 10:Interest Rates of Cooperative Societies and of Specialized Agricultural Banks or Institutions Owned or Sponsored by Government, Postwar (1950–54)
Cooperative Societies
CountryBorrowing rateLending rateRemarksName of Specialized Agricultural InstitutionLending RateRemarks
AFRICA
KenyaLand and Agricultural Bank of Kenya412This lower rate, introduced in 1945, caused an increase in applications for long-term loans.
LibyaGovernment through Barclays Bank612Short-term, 6 months to 1 year, against crops. Government guarantees 80% of the loan.
Nigeria312515Small seasonal advances to farmers.Nigerian Development Boards2–5Medium-term, 2 to 10 years.
Northern Rhodesia21255712
Southern RhodesiaLand and Agricultural Bank of Southern Rhodesia412512Rates on farming loans increased from 5% to 512% in July 1954 because of higher borrowing rates.
UgandaUganda Credit and Savings Bank5–6Less 12% for punctual repayment. Higher rate for more than 2 years.
ASIA
Burma12Practically all short-term.State Agricultural Bank614Permitted to grant seasonal and medium-term credits, but most loans seasonal.
Cambodia12Short-term, up to 18 months and one third of value of harvest.Office of Public Credit4–5For purchase of land, not over 4 years.
8Medium-term, up to 8 years and one third of value of real estate.
Ceylon3–64

9–12
Long-term, up to 15 years. Mostly short-term loans.State Mortgage Bank1512Medium- and long-term. Higher rate for smaller loans.
Agricultural and Industrial Credit Corporation5612Loans against primary mortgages only. Higher rate for smaller loans.
India3–66–12Mostly short-term loans.Government612Short- and long-term.
Indonesia6–1220Net rate is 12%, since 8% is forced savings.Government12
Japan7–8912Short-term credit.Settlers Fund Financing System3.65Up to 20 years. Total of loans is very small.
Owner-Farmer Maintenance Fund5.5Up to 30 years.
Central Cooperative Bank for Agriculture, Forestry, and Fisheries1 (see p. 138)4–7.5Medium- and long-term, up to 25 years.
PakistanGovernment312612From 1 to 10 years.
Agricultural Development Finance Corporation4–5Lower rate to cooperatives; higher rate to individuals. Mainly against security of land.
Philippines58Short- and medium-term loans.Agricultural Credit and Cooperative Finiancing Administration5

5
Short- and medium-tern to cooperatives.

Short-term to farmers.
Rehabilitation Finance Cooperation2

4

4–6
Short-term to farmers.

To rural banks uptto 10 years.

To homesteaders, up to 10 years.

Other loans.

To apex cooperative bank.
Thailand4–68

9–10
Long-term, up to 15 years.

Short- and medium-term.

Long-term, up to 15 years.
Government4–5To apex cooperative bank.
Viet-Nam6

8

10
Medium-term, 2 to 8 years.

Crop loans, 12 to 18 months.
LATIN-AMERICA
BoliviaAgricultural Bank of Bolivia8Plus other expenses, e.g., cost of trips of bank’s technician and guarantor. Lends up to 66% of such collateral as machinery and cattle.
BrazilBank of Brazil7Plus certain other expenses. Supplies 60–70% of total agricultural and rural credit.
Chile
Costa Rica CubaAgricultural Settlement Fund National Bank of Costa Rica Bank for Agricultural and Industrial Development6–7

6
Short-term, up to 2 years.

Short-, medium-, and long-term. Agricultural Division lends direct to agriculturist and through intermediaries. Short-term loans (up to 18 months); medium- and long-term mortgage loans (up to 25 years).
EcuadorMortgage Bank of Ecuador4–8Loans against personal, mortgage, and chattel guarantees.
Government8Short-term, up to 2 years only.
Credit Development System Banks (provincial branches)6–8Short- and medium-term, up to 5 years. Up to 60% of real estate and 80% of chattel mortgage.
El Salvador5Up to 20 years.Mortgage Bank of El Salvador5–7Short- and long-term, but about 90% of total in 1949 was long-term.
HondurasNational Bank of Development4–6Plus 2% for production loans. Short-term, up to 18 months. Loans secured by chattel mortgage on crops, farm implements, and live-stock.
8Plus 1% for administrative costs. Medium-term (4 to 7 years) and long-term (10 to 25 years). Loans secured by mortagage on farm.
Mexico8–911National Bank for Ejidal Credit8–9

11
To cooperatives. To farmers. Against up to 70% of value of crop.
ParaguayBank of Paraguay and its subsidiary, Crédito Agri-cola de Habilitación6–8Normally short- and medium-term, up to 5 years. Occasionally up to 10 years for purchase of land and buildings.
PeruAgricultural Development Bank of Peru6128Plus charges for technical aid. Short-, medium-, and long-term (up to 10 years). Lends up to 75–80% of security.
UruguayNational Institute for Colonization5512Long-term, up to 30 years, for purchase of land and improvements. Usually up to 25% of value of farm.
MIDDLE EAST
AfghanistanDa Afghanistan Bank and Afghan Agricultural Loan Bank3–8Up to 21 years.
Egypt35Agricultural Credit and Cooperative Bank3–5Mainly short-term, but also medium-and long-term. Lower rate to cooperatives; higher rate to farmers.
Agricultural Mortgage Bank5From 5 to 30 years. Up to 60% of value of land.
Iran9Plus fine of 12% if not paid by due date. For short-term. Rates of loan banks similar to cooperatives.Agricultural and Industrial Bank of Iran6Plus a progressive commission of 2–5%, which increases with size of loan. Usually short-term; occasionally up to 8 years.
IraqAgricultural Bank of Iraq Agricultural and Industrial Bank of Iraq5–6 7Up to 10 years; 40% of movable property, 60% of real estate, and 70% of gold.
IsraelAgricultural Bank of Israel44125Medium- and long-term, up to 12 years.
Jewish Foundation Fund3–4Up to 25–40 years.
Palestine Settlement Association4–6From 10 to 20 years.
National Bank of Israel5–7From 5 to 10 vears.
Jordan47Development Bank of Jordan4–6From 5 to 10 years.
Arab Land Company5.5–8From 8 to 10 years. Prior to 1953, rates were 7–9%.
Agricultural Bank of Jordan9Medium- and long-term, up to 10 years. Law prohibits loans to cooperatives.
Lebanon912Société du Crédit Agricole et Industriel du Liban4.8With government guarantee. Mainly
8.5Without government guarantee. short-term.
Syria912Agricultural Bank of Syria2–6Short-term (up to 3 years), medium-term (3–8 years), and long-term (up to 15 years). Up to 60% of mortgaged goods and 70% of goldor bonds.
Bank of Syria and Lebanon7–9
Turkey47–8Lower rate for loans below 500 liras; higher rate for larger loans.Agricultural Bank of Turkey5–7
Although this bank is an apex institution for the cooperative movement, about 85 per cent of its loans are financed by the Government.
Although this bank is an apex institution for the cooperative movement, about 85 per cent of its loans are financed by the Government.

The cooperative movement has been more or less firmly established in Asia. It began as early as 1904 in India, Pakistan, and Burma; in 1912 in Ceylon; and in 1916 in Thailand. In Indonesia and the Philippines, it was established much later and is generally less important there than in other Asian countries. In Indonesia, cooperative societies are not important because of the larger role played by the government-operated pawnshops and the village banks. In the Philippines, defects in the system of land tenure were grave obstacles to the development of agricultural credit in general and to the establishment of the cooperative movement in particular.

In Japan, the cooperative movement has provided adequate finance for agriculture; and the system of discounting agricultural bills with the societies, which in turn rediscount them with the Central Cooperative Bank for Agriculture and Forestry, has created a close link between the organized and unorganized money markets. But even in Japan the cooperative movement has supplied adequate credit only for the short-term needs of agriculture. While medium-term and long-term loans are becoming increasingly available through cooperative associations, they are still not adequate.

In British colonial territories, the degree of success of the cooperative movement has varied widely. In 1951, 84 per cent of the families in Cyprus had membership in the cooperative movement; in British Honduras the percentage was 36, in Fiji 22, in Mauritius 15, in Trinidad and Tobago 15, and in the Federation of Malaya 14. In most of the other territories, the percentage is much smaller than 5; for example, in Sierra Leone only 1 per cent of the families had access to any cooperative society.9

The cooperative movement in Cyprus is probably the most successful among underdeveloped countries. The movement was introduced in 1914; it had a slow start and the societies were at first regarded as merely lending and collecting agents of the Agricultural Bank (founded in 1925). The movement was reorganized in 1935 as a Raiffeisen thrift and credit type of society with unlimited liability and a Cooperative Central Bank was founded in 1937. Since then, the number of societies and membership have grown so rapidly that practically every farmer is a member of a cooperative society.

In several countries in Latin America and the Middle East, there is still no cooperative movement; where it does exist in these regions it is generally of recent origin. In Mexico, the cooperative agricultural credit system was established as early as 1926, an exception to the rule, but was not successful except in certain cases, such as the societies established by the cotton farmers. A small farmer who did produce a profitable cash crop such as cotton or sugar cane had difficulty in repaying his debts, and there was also a general lack of cooperative spirit. The cooperative movement in Bolivia and Guatemala was begun only after the end of World War II. In Cuba, experiments in cooperative credit are being made with the formation of rural credit associations affiliated with the Bank for Agricultural and Industrial Development.

In Jordan, the law establishing and controlling cooperative societies was passed only in 1952, while in Iraq the law regulating the movement was passed in 1944. In Lebanon, the only agricultural cooperative society that is in operation was established in 1936. The late establishment and slow growth of the cooperative movement in the Middle East has been attributed by some writers to the influence of the Moslem law which prohibits the levying of interest charges. This is probably an important factor in Jordan and in certain parts of Indonesia (in West Java and Northern Sumatra), but in other Moslem countries it may not have been a hindrance.

An exception to the rule of recent establishment of cooperatives in Middle Eastern countries is Egypt, where cooperative societies were established as early as 1907. They were failures in those early days, however, because of lack of government support and absence of any legislation to guide and organize the movement, the comparative novelty of cooperative theory and practice, and absence of higher authority within the movement to finance and supervise it. In recent years, however, the movement has expanded in Egypt, and its membership now covers about one fifth of the rural population.

Government institutions. The supply of credit by government, either directly or through agricultural credit institutions owned wholly or partly by it, had some importance before World War II, mainly in Latin American countries and in certain independent underdeveloped countries in the Middle East. Even in the twenties, there was some government supply of credit in a number of Latin American countries, and this received a stimulus when the great depression dried up the usual sources of agricultural credit. At present, nearly every Latin American country has some credit institution for financing agriculture with funds derived from the government. In Asian countries and in certain parts of Africa, agricultural credit institutions of this kind have been established generally only in postwar years.

Among the Middle Eastern countries, the Agricultural Bank of Turkey was established in 1863 and reorganized as a government-owned institution in 1937. As with most agricultural credit banks depending on funds from the government, it supplies both short-term and long-term credit. The share of long-term credit, which had been almost negligible, has recently been increasing; short-term loans declined from 96 per cent of total credit supplied by the Agricultural Bank of Turkey in 1948 to 77 per cent in 1953. The amount of loans repaid when due increased from 50 per cent in 1948 to 84 per cent in 1952.

Government-owned credit institutions obtain funds not only from the government budget but in many cases from the central bank as well. In Turkey, the Agricultural Bank in 1952 rediscounted with the Central Bank LT 340 million, compared with its total loans of LT 1,000 million.

Except in Latin America, the amount of credit granted by these institutions is generally small when compared with either noninstitutional sources of credit or other institutional sources. These government-owned or government-controlled institutions have made loans directly to the farmers and/or through cooperative credit societies and other financial intermediaries. Where cooperatives have not been developed, as in Latin America, most of the loans are granted directly to the farmer. For example, in Chile out of a total of Chil$2,621 million advanced in 1951 by the Agricultural Credit Fund, less than Chil$1 million was lent through small farmer cooperatives. Similar situations are known to exist in Cuba, the Dominican Republic, Ecuador, Haiti, Honduras, and Panama, and in Iraq and Lebanon.10

In Asia, governments have been a source of finance for the cooperative movement; generally, they have channeled most of their loans to agriculturists through cooperative societies or similar associations. There are important exceptions, e.g., Burma, where direct loans from the Government have been much more important than loans granted through cooperative societies.

Even where they are important, government-owned or government-operated credit institutions have usually financed the larger farmers and neglected the small farmer despite the latter’s greater need for finance. In the Agricultural Bank of Peru, a certain proportion of capital is reserved for loans to small farmers, but the proportion is only 20 per cent.

Another factor to note in regard to both government-owned credit institutions and other sources of institutional credit in the unorganized money market is that the principles of supervised credit and the provision of expert guidance and advice to the farmer are virtually lacking in most underdeveloped countries. In a few Latin American countries, such as Costa Rica, El Salvador, and Paraguay, however, supervised credit is available and used successfully to ensure that the farmer will be able to repay loans when due.

Although the granting of both short-term and long-term loans by these credit institutions is legally allowed (see Table 10), they generally grant credit mainly for short or medium terms. Although the law of the Agricultural Bank of Iraq allows loans of ten years’ duration, no loan granted between 1946 and 1951 was for more than five years. The value of the short-term loans granted by the Syrian Agricultural Bank has been much greater than that of long-term loans. There have been exceptions, e.g., the Uganda Credit and Savings Bank, where long-term loans have been larger. The importance of adequate longterm finance hardly needs emphasis, since long-term credit is required for permanent improvements to increase the productivity of agriculture.

Link Between Unorganized and Organized Money Markets

The general belief is that there is little connection between the unorganized and the organized money markets in underdeveloped countries. It is, however, quite uncertain whether the connection is so slight as to be negligible. Some of the missing statistics which would be helpful in determining the exact degree of connection are the volume of loans granted by lenders in the organized money markets to borrowers from the unorganized markets and the amount of relending which borrowers from the organized markets carry out in the unorganized markets.

The extent to which commercial banks operating in the organized money markets have financed directly or indirectly the agricultural sector of the economy is one indication of the closeness of the connection between the two markets. Table 9, which compares commercial bank loans, advances, and discounts to the agricultural sector with their total loans, advances, and discounts, shows that the larger the credit extended by commercial banks to agriculture, the closer the link between the two money markets. This criterion may be subject to distortion, however—for example, when the commercial banks lend a large part of their agricultural loans to estate agriculture or to large landlords who might be classified as belonging to the organized money market. But even in such cases it can be argued that the link between the two markets is becoming closer, because when large landowners obtain easier and larger credit from the commercial banks, they in turn will be willing to lend more to the small moneylenders and small agriculturists in the unorganized money markets. A common practice in underdeveloped countries is for large landlords to make short-term advances to their tenants or to small land-owning peasants.

Commercial bank loans to agriculture are less than 10 per cent of the banks’ total loans in most underdeveloped countries, except in some Latin American countries, such as Colombia, Cuba, Peru, and Paraguay, and in Indonesia and the Philippines. Thus, according to this criterion, the link between the two money markets is rather slight.

Another way of determining the degree of connection between the organized and unorganized money markets is to measure the relative importance of institutional credit in the unorganized money market, i.e., the relative importance of credit supplied to that market by such institutions as commercial banks, cooperative credit societies, land mortgage banks, private agricultural banks, and agricultural credit institutions financed by the government. 11 These institutions, except the commercial banks, lend money mainly in the unorganized money market, but a significant portion of their working capital (subscribed capital, deposits, and borrowings) is derived from the organized money market.12 To show the relative importance of institutional credit in the unorganized money market, and thus of the link between the organized and unorganized money markets, the outstanding agricultural loans of such institutions have been compared (see Table 9) with national income originating in the agricultural sector and with the currency in circulation. From these comparisons, it would seem that, according to this criterion, the link is negligible in most underdeveloped countries, except a few Latin American countries, such as Costa Rica, the Dominican Republic, El Salvador, Mexico, and Nicaragua.

In addition to these quantitative indicators, there is some scattered information on the amount of finance which moneylenders obtain from commercial banks and on the extent of credit which traders in agricultural commodities give to agriculturists. Commercial bank lending to moneylenders does not seem to be important, except in Southeast Asia in prewar years. The foreign moneylenders, mainly the Chettiars of India, obtained a substantial portion of their working capital in the decades prior to the great depression by borrowing from local branches of the foreign exchange banks and of the Imperial Bank of India.13

A report to the Ceylon Banking Commission in 1934 states that the exchange banks in Ceylon used to make large advances to the Chettiars in Ceylon, totaling about Rs 20 million a year, and that the Imperial Bank of India advanced an additional Rs 20 million each year before the depression. Since the total assets (mostly loans) of the Chettiars in Ceylon before the depression were about Rs 150 million, they obtained about one third of their working capital from commercial bank sources. Since the Chettiars were an important source of credit in the unorganized money market in Ceylon, the two markets were very closely linked. In Burma also, the Chettiars obtained from the foreign exchange banks and from the Imperial Bank of India advances amounting to about 10 per cent of their loans to agriculturists.14 Similar situations existed in Malaya, Indo-China, and Thailand.

The great depression drastically reduced the amount of loans which the commercial banks were willing to extend to the Chettiars, and also reduced Chettiar lending to the agriculturists. With the depression, the agriculturist could not afford to pay interest or amortization on the loans. The Chettiars foreclosed on the security of the loan and became owners of agricultural land and houses. The Chettiars in turn could not honor their debts to the commercial banks immediately. Thus the close connection between the two markets in Southeast Asia afforded by moneylenders borrowing from commercial banks was disrupted by the depression; and it has not been in evidence in postwar years.

The link between the two money markets afforded by exporters and traders in agricultural commodities borrowing from commercial banks and making advances to agriculturists, either directly or through smaller merchants, seems to be fairly common in underdeveloped countries with a large export sector. Exporters make advances to agriculturists in order to ensure an adequate supply of agricultural produce at favorable prices. In British West Africa, the large trading firms provide a considerable amount of finance to African produce buyers and retailers. For example, in 1948 the United Africa Company obtained 85 per cent of its cocoa, 76 per cent of its groundnuts, 15 per cent of its palm oil, and 28 per cent of its palm kernels by means of such advances to produce buyers. 15 In Peru, advance payments by cotton ginning plants and large cotton buyers and exporters are made to cultivators in order to ensure a regular supply of the crop at the time of harvest.

Where marketing boards have been established, these financial links are not severed, for the buying agents of these boards continue giving credit to the smaller traders who in turn give credit to the agriculturists. Thus, in Nigeria a substantial source of seasonal credit is available from these buying agents who have obtained much of their funds from the commercial banks. It is believed, however, that the small middlemen who receive loans from the buying agents frequently use the funds in other businesses before utilizing it for the purchase of the crop.16

In some underdeveloped countries, a link between the two markets is also provided by importers who extend credit to wholesalers who in turn extend credit to village retailers. Thus, for example, in Burma before the war a considerable amount of credit was granted by importers and dealers to finance the distribution of imported textiles, hardware, mill parts, etc. The credit system, however, was interrupted by the war and has not since been restored. 17

So far this discussion has dealt mainly with the extent to which the volume of credit in the unorganized money market is affected by operations in the organized market. Some attention should be paid, however, to the significance of the relation between the two markets for the general direction of monetary policy. The link between the markets is much more effective in countries where it is provided mainly through commercial banks granting credit to agriculture, either directly or through cooperative societies and special agricultural credit institutions, than in countries where it is provided either by exporters of agricultural commodities making loans to agriculturists or by importers financing the distribution of imports. In most underdeveloped countries, except a few in Latin America, the general situation is that commercial bank loans to agriculture are not so important as the financial assistance that percolates down through the large dealers to the agriculturists. As a rule, the proportion of credit made available in the unorganized market that is in fact supplied by the organized market is larger than is generally supposed; but, except in a few countries, the unorganized market is not much affected by changes in credit conditions in the organized market.

Japan is almost the only country that has developed an effective close link between the two money markets. This has been achieved mainly through the agricultural bill system which has been incorporated into the cooperative movement. In order to raise funds, agriculturists and cooperative associations draw promissory notes or “agricultural bills.” These bills are discounted and rediscounted by the cooperative associations, the credit federations, and the Central Cooperative Bank for Agriculture and Forestry, which borrows funds from the Bank of Japan whenever necessary.

In Cyprus, the Cooperative Central Bank had overdraft arrangements with Barclays Bank (Dominion, Colonial, and Overseas) as far back as 1938; the overdraft has been fairly substantial in relation to the size of the cooperative movement. In Mauritius, the Cooperative Bank and the Cooperative Wholesale Society have been financed mainly by Barclays Bank. In most parts of British Africa, loans are granted by the British banks to cooperative societies with government guarantees, but their amount is generally small. In the Middle East, judging by the situation in Jordan and Lebanon, and in Asia, cooperative societies have borrowed very little from the commercial banks.

Although agricultural credit institutions have generally not obtained much finance from commercial banks, there have been important exceptions, e.g., Dawsons Bank in Burma, which before the war had overdraft facilities with the commercial banks for financing seasonal crop loans. The Land and Agricultural Bank of Southern Rhodesia has obtained considerable financial assistance from Barclays Bank; in 1952 it obtained an overdraft of almost £1,000,000, which constituted about 25 per cent of its seasonal advances and 11 per cent of its total advances.

A good qualitative link is established when the central bank supplies credit to the agricultural sector either directly or through special credit institutions. This type of link has been important in many Latin American countries and is becoming important in Middle Eastern and Asian countries. In Honduras, the central bank may absorb up to 40 per cent of the mortgage certificates and bonds issued by the Development Banks for medium-term and long-term financing. In Iraq, the central bank has given large sums of credit to the Agricultural Bank; in 1951–52, such credit amounted to 53 per cent of the Agricultural Bank’s loans to agriculture, and in 1952–53 to 25 per cent. In the Philippines, the central bank gives financial assistance to the newly established rural banks.

The main advantage of this type of link is that the central bank can influence more directly the cost and availability of credit in the unorganized money market; the main disadvantage is that the central bank is likely to be under political pressure not to restrict credit in the unorganized money market even when an over-all credit restriction is warranted.

Level and Structure of Interest Rates

Level of interest rates

It is difficult to determine precisely the weighted average rates of interest which prevail in the unorganized money markets of under-developed countries, for even where data are available, the rates quoted cannot always be taken at face value. This applies both to rates charged by moneylenders and to rates charged by the credit institutions.

Moneylenders’ rates in different countries cannot be easily compared, because, to begin with, the intensity of their sharp practices varies between regions and countries. Some of the common practices which increase effective rates include deducting the interest charge at the time the loan is made, charging interest on the original amount lent rather than on the unpaid balance, not keeping proper books or giving receipts so that the borrower can be made to pay more than agreed, demanding additional services for the favor of giving a loan, and lending in money against the security of standing crops, but demanding repayment in kind and undervaluing the commodity used.

The last named malpractice seems to be common in many under-developed countries; it is known as shayl lending in Northern Sudan and sabape in Burma. The essence of the practice is the extraction of an exorbitant rate of interest by having the commodity in which a loan is repaid valued at a price much lower than that which is likely to prevail at harvest time. The lender thus reaps the benefit not only of the usual high rate of interest but also of the difference between the two prices. Where loans are granted in kind, i.e., fertilizers, seed, ploughs, etc., additional benefit may be derived by the moneylender overpricing the articles supplied. Variations of this type of lending are also to be found in credit sales by a village storekeeper who obtains hidden interest by overpricing the goods sold and underpricing the repayment in kind. In Indonesia, the malpractices arising from lending in money and demanding repayment in kind are common in the fishing industry; before the war they were responsible for effective rates of interest ranging from 50 per cent to 500 per cent per annum.

Of course, not all the interest charges which the moneylender levies accrue as net income to him. First, there are a number of payments and services for which he is responsible; in many countries he has to pay the taxes which are due on the crops. He may also supervise and advise the cultivator during the crop season. On loans against agricultural commodities, he sometimes has to pay for storage and transportation.

Another difficulty in determining the level of interest rates charged by a moneylender stems from the unorganized nature of the market, which allows rates to vary considerably between different parts of the country. The extent of the variation may be seen from the data for Ceylon, Thailand, and India given in Tables 2, 3, and 4. The regional variations are due partly to differences in demand conditions and partly to differences in the availability of supply. In Ceylon, the rates charged by the moneylenders tended to be lower in areas where credit institutions, such as cooperative societies, were well established (Table 2). In India, according to the All-India Rural Credit Survey, interest rates were highest in districts which could be classified as part of the subsistence sector; next came districts which had recently been monetized; and rates were lowest in districts which were both commercialized and monetized (Table 4). The availability of institutional credit also seems to have affected the level of interest rates, for in districts with low interest rates there were more offices of the Imperial Bank of India than in districts with high rates.

The difficulty of determining the true level of interest rates on loans granted by credit institutions and by governments stems from the manner in which such loans are disbursed. These interest rates are low, but loans are usually granted only after considerable delay18 and at the administrative headquarters (in small towns) instead of in the villages. Consequently, the cultivator has to incur considerable expense for travel and accommodation to obtain a loan, not to mention occasional favors demanded by the loan-disbursing officials. The effective rate of interest even on government loans is thus higher than is usually supposed.

Another difficulty arises from the additional charges levied by some credit institutions. For example, the Agricultural Bank of Bolivia in 1952 charged not only the nominal 8 per cent per annum interest, but also the expenses of the initial trip of the bank’s technicians, the trip of the guarantor to see the property, and other incidental expenses.

Other costs of borrowing from credit institutions arise from notarial or conveyance fees, stamp duties, and the cost of certifying copies of title documents. Where titles to land are doubtful because of the absence of a system of registration of title, as in Ceylon, the costs are much higher. It has been estimated that the cost of establishing a satisfactory title to land for borrowing from the Agricultural and Industrial Credit Corporation of Ceylon varies between 5 and 10 per cent for a loan of Rs 3,000. 19

There may be still other special difficulties in attempting to measure effective interest rates precisely. The rates charged by the Indonesian village banks are fairly high because an element of compulsory savings is incorporated in the loan system. Of the 20 per cent which a borrower has to pay, only 8 per cent is the real interest charge, 12 per cent being compulsory savings. After a village bank has been well established, the 20 per cent charge is maintained, but the real charge is reduced to 4 per cent and the compulsory savings increased to 16 per cent.

Interest rates charged by credit institutions are generally low. Indeed, in most countries, the rates charged by cooperative societies and by government-owned and government-sponsored agricultural banks are lower than the rates charged by commercial banks for financing trade. The rates charged by moneylenders, on the other hand, are generally very high, as shown in Table 11. The figures in the table are meant to convey orders of magnitude rather than precise data, since the sources for many countries are not reliable. The rates shown have taken into account, as far as possible, the malpractices of the moneylenders. In compiling the table, certain arbitrary standards and subjective judgments have been used in classifying rates as lower exceptional, usual, occasional, or higher exceptional rates. The usual rate is that at which more than half of the total loans of moneylenders are granted, while the occasional rate refers to loans constituting from 10 to 20 per cent of the total. The lower and higher exceptional rates refer to loans constituting less than 5 per cent of the total loans granted.

The weighted average rate of interest charged by both institutional and noninstitutional sources in the unorganized money market depends upon the relative importance of the two sources and the average rates charged by each source. On the basis of the information in Tables 10 and 11, and in the light of all that has been said above regarding hidden interest charges, the average effective rate charged by credit institutions may be put at 12 per cent per annum, and the average effective rate charged by individuals at 36 per cent per annum. It is then a matter of arithmetic to derive the weighted average rate of interest in the unorganized money market from the relative importance of institutional and noninstitutional credit. In countries where institutional and noninstitutional credit are equally important, the weighted average rate will be 24 per cent per annum; in those where noninstitutional credit has greater importance, it will approach 36 per cent per annum. Since in most underdeveloped countries noninstitutional credit is more important than institutional credit, it may be concluded that the weighted average rate of interest in those countries is usually between 24 and 36 per cent per annum.

Structure of interest rates

It has already been noted that interest rates charged by noninstitutional sources vary from region to region and that the variation is due partly to differences in the accessibility of rural areas to an organized money market.

Within the cooperative movement, the structure of interest rates is more or less the same as the structure in the organized money market in one respect—namely, that rates are lowest at the source from which the supply of funds is drawn and highest at the point where funds become available to the final user. The rates charged by “apex” institutions to central cooperative banks are lower than those charged by the central cooperative banks to the primary cooperative societies; and the highest rates are those charged by the cooperative societies to their members. This can be seen in both Table 10 and Chart 1. Central cooperative banks also generally charge a higher rate of interest on direct loans to agriculturists than on loans to primary cooperative societies. This is evidently an attempt to keep the rates charged by the primary cooperative societies in a competitive position vis-à-vis the rates charged by the central cooperative bank on loans to agriculturists.

Chart 1.Structure and Trend of Interest Rates of Cooperative Societies in Madras, India, 1916–54

(In per cent per annum)

Sources: Reserve Bank of India, Banking and Monetary Statistics of India (Bombay, 1954), pp. 726–29, and Statistical Statements Relating to the Cooperative Movement in India, 1952–53 and 1953–54 (Bombay, 1955).

The rates in unorganized money markets vary with the size of the loans, being generally lower as the loan gets larger. In Indonesia, the rate charged by the small loan banks in the rural sector on loans below the equivalent of US$2.20 was 4 per cent per month, while the rate on loans of US$8.77 and above was 1 per cent per month. In the Philippines also, the legal maximum permissible rate on loans in the rural areas was 2.5 per cent per month on loans up to the equivalent of US$50, while on loans from US$50 to $250 it was 2 per cent per month and on loans larger than US$250 it was 1.17 per cent per month.20

The structure of rates in the unorganized money markets in under-developed countries, however, differs from that of the organized money markets in both developed and underdeveloped countries insofar as the short-term rates charged by credit institutions seem to be higher than the long-term rates. In Thailand in 1952, the cooperative societies charged members 10 per cent per annum on short-term and medium-term loans, against 8 per cent per annum on long-term loans. In Cambodia, the cooperative provincial bureaus charged 12 per cent per annum on short-term loans up to 18 months but only 8 per cent on medium-term loans. This is the result partly of policy decisions (by the government-controlled credit institutions and cooperative societies) and partly of the fact that the collateral normally used for long-term loans is agricultural land, which is much superior to the collateral used for short-term loans, namely, promissory notes, stocks of agricultural commodities, cattle, etc.

The rates charged by moneylenders follow similar patterns. Thus, before World War II the Chettiars in Southeast Asia, especially in Burma and Ceylon, charged lower rates for long-term than for short-term loans. In Cambodia also, the rates charged by the moneylenders are higher on loans of short duration; and the rates on small loans have tended to be higher than on large loans21 The explanation of the higher rates on loans of short duration is in part the same as already suggested for the practice of credit institutions. The higher rates may also be due to the difficulty, often mentioned by moneylenders, of finding new borrowers and the possibility of having funds lie idle between repayments and new loans.

In Honduras, the structure of rates charged by credit institutions, at least for the short-term period of 18 months, is not the same as in other underdeveloped countries. The Central Bank has fixed maximum rates for crop loans from credit institutions to agriculture at 4 per cent per annum for loans of 6 months’ duration, 5 per cent for 9 months, and 6 per cent for 18 months, plus an over-all 2 per cent for loans equivalent to less than US$5,000.

Generally speaking, interest rates in the unorganized money markets have not been subjected to the same kind of seasonal and cyclical fluctuations as in the organized money markets. There should be no seasonal fluctuations, because most of the borrowing and lending is for the financing of production, all of which takes place at one season of the year with practically no lending at other times. Most agricultural loans are demanded and made available before the beginning of the agricultural season, and the quantity borrowed should cover all expenses until the crop is harvested.

There are, however, some agriculturists who are unable to obtain all their requirements at the beginning of the season because they do not have sufficient collateral or credit standing to borrow the full amount. They are forced to rely on loan sharks, pledging their crops a few weeks before harvest time. Since the interest charged on such loans is much higher than the usual rates, it may be argued that, for the market as a whole, there is a certain amount of seasonality in the rates of interest. This seasonality is not induced by an expansion in demand for loanable funds during the busy time of the year when the level of demand is at a peak, but occurs at a time when demand is rather small. It is caused mainly by the fact that the usual sources of supply have dried up and that the credit standing of people who borrow at this time is much below the average.

Cyclical fluctuations in interest rates are noticeable in the unorganized money markets but they arise in a different fashion and move in a different direction from those of the organized money markets. During the upswing of a business cycle, when prices of agricultural products are rising, land values also tend to rise. This has the effect of increasing the value of the collateral which agriculturists can offer to credit institutions and to reputable moneylenders. With rising agricultural incomes, some of the landless peasants become landowners. Insofar as there had been moneylenders and credit institutions with funds unutilized because suitable collateral was not available, the changed situation will have the effect of increasing the supply of loanable funds at the usual rate of interest. Since the interest rate on loans with land as collateral is lower than on loans without collateral, the weighted average rate of interest paid by agriculturists as a whole will tend to fall. It follows, therefore, that the effective rate of interest in the unorganized money market tends to fall in a boom period of rising agricultural prices and of land values, which is just the opposite of the cyclical changes in interest rates in the organized money market.22

In a period of falling agricultural prices, the value of land falls, which means a reduction in its importance as collateral. Furthermore, with foreclosures on loans which have not been repaid because of falling agricultural incomes, the ownership of land passes into the hands of moneylenders and credit institutions. The supply of credit at reasonable rates of interest dries up. Moneylenders who have lent on promissory notes or verbal promises to pay cannot and do not foreclose on the loans and thus the supply of credit at exorbitant rates of interest does not dry up in the same way. The effect of all this is to increase the weighted average rate of interest in the unorganized money market in a depression.

The experience of Burma and Ceylon during the years before and after the great depression illustrates these cyclical changes in interest rates. Chettiar lending in both countries against land as collateral had expanded rapidly during the boom period, but in the depression the Chettiars foreclosed on loans and became owners of land. In other countries, there were similar changes; the supply of institutional credit, at more or less constant interest rates, fell sharply in depression years, while it is doubtful if loans by moneylenders at exorbitant rates fell at all. In Indonesia, the number and value of pawns accepted by state pawnshops declined from 56 million pawns valued at f. 207 million in 1929 to 27 million pawns valued at f. 78 million in 1933. In Egypt, the value of mortgage loans extended by mortgage banks and mortgage companies fell sharply during the depression from the 1930 level of LE 29 million, and even by 1940 had recovered to only LE 19 million.

The weighted average rate of interest also tends to rise whenever there is a crop failure which forces agriculturists to fall back on the less reputable moneylenders. The rise is softened to the extent to which government and private relief funds are made available. Government measures of remission of land revenue, etc., are common in most under-developed countries. An example of an unusual type of private relief is to be found in Afghanistan, where no interest rates are charged on “Hassana” loans granted to those suffering from sudden calamities. Although security is demanded on these loans, the loan period is indefinite.

The long-term trend of interest rates in the unorganized money market would be expected to be downward; but so far there does not seem to have been much change in the rates charged by moneylenders except in isolated areas or in a few instances. Rates of credit institutions have, generally, declined in most countries. In India, the whole structure of rates of the cooperative movement has been much lower in recent years than in the early decades of the twentieth century (Chart 1). The policy adopted by governments to provide cheap credit to agriculturists, especially on credit supplied by government-controlled credit institutions, is in part responsible for this movement. The rate of interest charged by the Land and Agricultural Bank of Kenya when it began operations in 1931 was 61 per cent, but in recent years it has been reduced to 42 per cent. In Egypt, the rate charged by the Agricultural Credit Bank of Egypt to individuals, which had been 7 per cent per annum, has been lowered since World War II to 4 per cent.

Causes of High Interest Rates

Many explanations have been offered for the high interest rates that generally prevail in unorganized money markets. One theory is that interest rates are high there because they are determined by custom and have always been high. This might be called the theory of the customary rate of interest. It has been put forward by many writers; for example, W.T. Newlyn and D.C. Rowan, discussing interest rates in British Colonial Africa, conclude that “in the type of economy we are considering, interest rates are likely to be determined mainly by law or convention and to respond very little to changes in the local demand and supply for loanable funds.”23 These writers believe that such considerations are important for all economies in which loans are contracted by private bargains between two individuals rather than through the market.

There is probably some truth in this theory—at least as a short-run explanation of high rates of interest. In Israel, for example, soon after the British mandate was established after World War I, it was customary to charge £14 as interest for every £10 that a landless Arab peasant borrowed from a moneylender. This custom became so fixed that the common term for interest was assara arbatash (ten to fourteen).24 There can be no question, however, that in the long run, when economic and social conditions in underdeveloped countries change, the rate of interest will change.25

The theory of customary rates is not satisfactory, however, because it does not explain how or why the custom of high rates developed. The true explanation has to be found in the economic and social conditions of underdeveloped countries, which cause the demand for loanable funds to be large in relation to the available supply. Some writers tend to explain the high rates of interest in terms of demand factors while others emphasize supply.

The demand for funds, in relation to the supply, is large because the average borrower in the unorganized money market has a very low income and therefore has no surplus funds to finance his business operations. The majority of the cultivating tenants—one of the most important groups of potential borrowers—have to borrow money not only for investment in land, cattle, etc., and for working capital to make purchases of seeds and fertilizers, but also for their minimum basic necessities of food, shelter, and clothing.

On the supply side, there is a general shortage of capital in under-developed countries and an inadequate level of domestic savings. Also, the small amount of domestic savings is not channeled effectively into the unorganized money market because of the absence of proper financial and credit institutions which not only would integrate the organized and unorganized money markets but also would facilitate the mobilization of savings in the rural areas.

Both demand and supply factors are mentioned in the Final Report on the Economic Survey of Rural Ceylon as being responsible for high rates of interest. According to this report, “The high rates of interest… are not wholly due, as sometimes supposed, to the inhumanity of the moneylender. Scarcity of capital even if the moneylenders were benevolent must necessarily raise interest rates. The moneylender’s rate includes returns for the risk he takes by lending against pronotes [promissory notes], mere promises or doubtful securities. When he is satisfied about the integrity of the borrower and the security offered, the rate he charges is sometimes even less than that of the cooperative societies. But this is not to say that the moneylender does not take advantage of the weak position of the borrower or the inelastic character of the demand for the loans, when they are raised owing to sickness or under great difficulties. Scarcity of capital and inadequate security enable him to exploit the situation.”26

The difference in the levels of interest rates between the organized and unorganized money markets stems partly from the basic differences between the sources of supply of funds in the two markets. In an organized money market, facilities for the expansion of credit are open to the commercial banks, which have the use of funds belonging to depositors. These banks are therefore able to charge relatively low rates of interest and yet make satisfactory profits for the shareholders. On the other hand, moneylenders in an unorganized money market have little influence on the supply of funds at their disposal and, furthermore, their supply price tends to be influenced by the alternative uses to which their funds can be put.

A number of institutional factors are also responsible for high rates of interest in unorganized money markets. The size of the loan is usually small and thus the fixed handling charges are relatively high. Defaults also tend to be larger in unorganized money markets.27 These higher defaults are due not so much to a lower standard of morality and willingness to repay debts as to the fluctuations in prices and incomes derived from agricultural products, which reduce the ability of the agriculturists to repay debts at inopportune times. Thus, in referring to moneylending in the Middle East and Asia, the summary report of the International Conference on Agricultural and Cooperative Credit states that “the exorbitant rates of interest charged by the village moneylenders are explained, if not justified, by the high risks and high costs involved in supplying credit in small amounts.”28 A UN report mentions that “high rates of interest are at the same time a symptom and a cause of risks in investments.”29

Another general factor causing high rates of interest is experience in regard to inflation. While this is probably of importance in many Latin American countries, it hardly seems relevant for prewar colonial territories which, by their rigid currency exchange standards, had maintained fairly stable conditions but still had high interest rates in the unorganized money markets. The large development programs in most underdeveloped countries, however, constitute possible inflationary pressures and may be considered as a factor in maintaining high rates of interest.

The list of causes of high interest rates could be extended to include other social and economic factors in underdeveloped countries—even to fairly remote factors, such as the system of land tenure which prevents land from being used as collateral. A general statement, however, is that interest rates in the unorganized money markets of underdeveloped countries are high because the economy is underdeveloped and the money market unorganized.

While both demand and supply factors have to be taken into account in explaining the high level of interest rates, some indication of which is the more important is desirable. In order to arrive at some conclusions, two hypothetical tables have been compiled, one focusing attention on some aspects of demand and the other on one aspect of supply.

In Table 5, interest rates are viewed from the supply side with reference to the influence of defaults on the rates which the lender would like to charge. In compiling the table, it has been assumed that (1) the lender does not recover any money from the defaulters; (2) the lender tries to recover not only the principal of the loans granted but also the interest which he would have earned on such loans (by charging higher rates of interest so that the return from the nondefaulters is sufficient to cover the loss of principal and interest from the defaulters); and (3) the rate of interest charged does not influence the volume or value of the defaults.30 The table is presented in the form of a matrix with two variables, the value of defaults as a percentage of total loans granted and the normal interest rate which the moneylender would like to charge in the absence of any defaults. For example, if the normal rate of interest is 15 per cent per annum, a rate of default of 5 per cent would raise the supply price (or rate) to 21.05 per cent per annum under the assumptions mentioned above.

The demand table (Table 6) has been compiled to show the rates of interest which “foolish” borrowers in the unorganized money market are willing to pay if they take no account of interest earned on their own capital and consider only the necessity of obtaining borrowed capital to finance their total agricultural operations. This viewpoint may seem rather unorthodox and unrealistic to those unaware of the economic and social conditions prevailing in unorganized money markets in underdeveloped countries. The literature on the subject and knowledge of underdeveloped countries, however, justify the belief that many agriculturists do behave in this “foolish” fashion. Their attitude may be rationalized on the ground that without funds to purchase seeds, fertilizers, etc., the agriculturist would not be able to cultivate his land and would earn no return on his own capital. This table is also organized in the form of a matrix, the variables being (1) borrowed money as a percentage of total capital or outlays and (2) the productivity of total capital or outlays. The interest rate which the borrower is willing to pay has been calculated on the assumption that he is willing to pay the lender as interest the full product of the total capital (that is, the borrowed money plus his own capital). Thus, for example, if the productivity of the total capital is 10 per cent and the borrowed money is 50 per cent of the total capital, it is assumed that the borrower would be willing to pay 20 per cent on the amount borrowed, foregoing any return on his own capital.

In actual practice, the productivity of capital in agriculture would not be expected to be higher than 10 per cent per year. With a productivity of 10 per cent per year, the potential borrower would be willing to pay an interest rate of more than 100 per cent per annum only if the amount of borrowed money were less than 10 per cent of the total capital. The smaller the percentage of borrowed capital, the higher the interest rate which the borrower may be willing to pay; in Table 6, the rate reaches 1,000 per cent per annum for a productivity of capital of 10 per cent and borrowed money constituting 1 per cent of total capital.

This situation on the demand side may be compared with the situation on the supply side. As shown by Table 5, even with defaults amounting to 50 per cent of total loans and a normal interest rate of 50 per cent per annum, the lender would need to charge only 200 per cent per annum to compensate fully for defaults. A comparison of this figure with the high figures in Table 6 for less extreme assumptions suggests that the exceptionally high rates of interest in the unorganized money market are due more to excessive demand than to a premium to insure lenders against the risk of default. As a matter of fact, the rate of default, although high, would hardly ever be as high as 50 per cent. On loans granted by credit institutions, which are usually adequately secured by good collateral, such as land, the rates of default have been exceptionally low. Thus, for example, the Land and Agricultural Bank of Kenya, though limited in the size of its operations, has had very few defaults: of the total interest payments which have fallen due since the bank’s inception in 1931, only 1.4 per cent had to be written off and only 1.3 per cent of the interest was overdue at the end of 1954. The amount of defaults of the Land Bank of Tanganyika also has been small: between its inception in 1951 and December 1954, only 2.96 per cent of interest payments became overdue. Of course, in some cases where the management of the credit institutions has been poor or because of special circumstances, the rate of default has been much higher. In Iraq, the average rate of delinquency31 has been said to vary between 20 per cent and 40 per cent. In Jordan, there was a high rate of delinquency, especially after the moratorium law was passed in 1947. In Lebanon and Syria, there has been practically no delinquency among private credit institutions, but administrative laxity caused a considerable number of delinquencies when, after World War II, the Government lent money directly to agriculturists.

It is true, of course, that the average rate of default for the unorganized money market as a whole cannot be measured only from loans secured by good collateral, such as land. Defaults on loans with poor collateral or with no security should also be studied. A good test would be the number of defaults when agriculturists are suffering a loss of income arising from a depression. The experience of the state pawn-shops in Indonesia provides some relevant evidence on this point. The percentage of unredeemed pawns has generally been low, and even during the worst depression years of 1930–32 the value of unredeemed pawns which were auctioned never exceeded 15 per cent of the total pawned.32 The defaults on unsecured loans tend to be higher than those on secured loans, but they are held down by virtue of the fact that professional and other moneylenders have moral, economic, and social ways of exerting pressure to make the borrower repay. Some of these factors include public identification of the borrower as a debtor, public disgrace as an unreliable person, and, most important of all, the possibility that further loans will not be available when needed.33

In addition to the evidence on low defaults cited above, it should be borne in mind that the assumption on which Table 5 is based (i.e., that the lender recovers no money from defaulters) is not at all realistic as regards secured loans. It may be concluded, therefore, that the urgent and inelastic demand of borrowers and the absence of alternative sources of credit are the principal factors that enable moneylenders to exact very high rates of interest.

Evaluation of Measures to Reduce Interest Rates

The measures taken by governments to bring down interest rates may be grouped under four headings: (1) laws or decrees stipulating maximum limits for the rates of interest which may be charged by moneylenders and credit institutions in rural areas or in the agricultural sector; (2) laws designed to curb moneylenders’ malpractices which have raised the effective rate of interest; (3) the sponsoring or the encouragement of the development of private agricultural credit institutions, such as cooperative societies, land mortgage banks, village banks; (4) loans to the agricultural sector, either directly or through intermediary credit institutions.

Legal measures

Legal measures to control interest rates have been adopted in most underdeveloped countries. In Burma, the legal maximum rate is 12 per cent per annum for loans with collateral and 18 per cent per annum for loans without collateral. In Thailand, the legal maximum rate is 15 per cent. In most states in India the maximum stipulated rate (simple interest) on unsecured loans is generally about 12 per cent per annum: in Hyderabad, the maximum rate is 9 per cent; in Madras, it is 51½ per cent; while in Uttar Pradesh, it is 24 per cent. In Pakistan, the maximum rates (simple interest) are 12 per cent on secured loans and 18 per cent on unsecured loans in the Punjab; in Bengal, they are 15 per cent on secured loans and 25 per cent on unsecured loans. In Korea, the legal maximum rate, which was established 40 years ago, is 20 per cent per annum.

The maximum permissible rate in many Latin American countries is around 12 per cent per annum. In Chile, the maximum rates are between 12 and 18 per cent per annum.

Maximum rates of interest have also been established in British colonial Africa. In Nigeria, the maximum rate allowed is 12+ per cent on the first mortgage on property, 15 per cent on the second mortgage, and 45 per cent on promissory notes.

In both Jordan and Lebanon, the legal maximum rate is 9 per cent per annum, the law in Jordan being a survival from the Ottoman days. In Iraq, the legal rate (presumably for credit institutions) is 7 per cent per annum. According to a law of 1933, a landlord is not allowed to charge interest on advances to cultivators, but this has been circumvented by the landlord collecting a share of the crop far out of proportion to the cost of the seed furnished to the cultivator.

With some exceptions, legal maximum rates for ordinary lending are usually less than 18 per cent per annum. For pawnbroking, however, in at least two countries—Ceylon and the Philippines—the maximum permissible rates seem to be higher. In Ceylon before World War II, the maximum rate on pawns of Rs 20 or less was 24 per cent per annum, and for pawns of more than Rs 20 it was 19.2 per cent. In the Philippines, the legal maximum rates for pawnshops in Manila since the war has been 30 per cent per annum for loans of less than P 100, 24 per cent for loans between P 100 and P 500, and 14 per cent for loans exceeding P 500.

Attempts to lower interest rates by law have not been successful. Usually, nominal rates conforming to the legal rates are recorded, but other ways are developed to obtain higher effective rates. A promissory note may be obtained for a sum larger than that actually lent; a separate additional promissory note may be made in favor of a relative of the moneylender to cover the extra interest; interest computed at the legal rate may be deducted in advance from the amount lent; a loan transaction may be disguised as a forward purchase with false valuation of the debtor’s produce; or a contract which is legally unobjectionable may be combined with an illegal, informal understanding on the substance of the contract.

As a result of such evasions, interest rates in underdeveloped countries have generally been higher than the rate permitted by law. Thus, in India in 1951 most of the borrowings by cultivators from traders, moneylenders, and landlords were at rates much higher than the legal maximum. In Bihar, Madras, Orissa, West Bengal, and Hyderabad, the amount of credit obtained at rates higher than the legal maximum was estimated at between 80 and 90 per cent of the total.34

The legal rate of 12 per cent per annum has been a failure in Haiti. According to a UN report, it is difficult, in practice, to control the taking of interest rates above 1 per cent per month, in view of the lack of organization of the credit system in Haiti. The same UN report points out that in Chile maximum rates are in practice disregarded because of inflation, which compels the moneylender to protect his capital, and the difficulties of small farmers in obtaining credit from government and banking institutions.35 In Korea also, because of the inflation, even the rates actually charged by credit institutions have been about 10 to 15 per cent per month, compared with the legal maximum of 20 per cent per annum.

In order to curb the malpractices of moneylenders, attempts have been made to control legally the terms and conditions under which loans are granted in unorganized money markets through the compulsory registration of moneylenders and their transactions and by regulating land mortgages and the use of crop liens. In India, the main legislative provisions relating to moneylenders cover licensing and registration of moneylenders, maintenance of accounts in prescribed forms, furnishing of receipts and periodic statements of accounts to debtors, fixing maximum rates of interest, protection of debtors from molestation, intimidation, etc., exemption from attachment of items of debtor’s property, regulation of mortgages, and penalties for infringement and machinery for enforcement.36 Other countries, except possibly Pakistan, do not have legislation as comprehensive as that of India, but many, e.g., Burma and Ceylon, have attempted to regulate the activities of moneylenders. In British colonial Africa, all territories except Tanganyika require the local registration and licensing of moneylenders, and standard forms of agreement have to be used by lenders and borrowers.

Other reasons for the failure of attempts to regulate moneylenders are that most moneylenders do not obtain licenses (although required by law) to carry on their business, the law enforcement machinery is generally weak, and governments can do nothing when there is collusion between the borrower and the lender. Thus in the Middle East, “The [lender’s] desire for profit, and the [borrower’s] need for immediate cash, are so strong that they conspire together not only to break the law, but also to destroy by mutual agreement any documentary evidence which might be used by the borrower against the lender at a later date.”37

There is, moreover, evidence that in many cases government legislation has caused the supply of rural credit to fall off and the effective interest rate to rise; the greater risks taken by moneylenders in evading the law have added to the cost of lending and sometimes have led to a higher effective rate of interest. An FAO report concludes that “it is a waste of time to legislate against moneylending unless there is an organization to take the place of the moneylenders.”38

Measures to increase supply of institutional credit

Governments have made some headway in encouraging the development of private agricultural credit institutions and in supplying credit either directly or through central banks and specialized institutions. But the amount of such lending and encouragement is still limited, and it has not been sufficient to reduce significantly the rural rate of interest. It should be recognized, however, that there are difficulties in expanding government lending. The difficulties are due not only to inability to ensure the efficient handling of loans and to prevent the abuse of powers by bureaucratic officials but also to both the limitation of resources available to the government and the threat of inflation from excessive credit expansion.

Rural rates of interest cannot be lowered by the simple expedient of flooding the rural areas with agricultural credit created by the printing press or the central bank. Loans by the government have to be limited to the real resources which the government can obtain by taxation and noninflationary borrowing.

Government and central bank lending to the agricultural sector directly or through special financial intermediaries is common in many underdeveloped countries. Government loans to cultivators were granted in Burma, India, and Pakistan as early as 1883 for long-term loans and in 1884 for short-term and medium-term loans, but the amounts lent were not large. In the period since World War II, however, government loans have become Burma’s largest single source of supply of credit to the cultivators.

Many countries are taking steps to improve the lending machinery of government and central bank agencies and also to increase the supply of institutional credit to agriculture. The Reserve Bank of India Act was amended in 1955 to enable the Reserve Bank to establish (1) the National Agricultural Credit (Long-Term Operations) Fund and supply it with funds consisting of an initial sum of Rs 100 million plus a minimum of Rs 10 million per year in the first five years and (2) the National Agricultural Credit (Stabilization) Fund with a minimum contribution by the Reserve Bank of Rs 10 million per year for the first five years.

The Central Bank of the Philippines has provided funds to agriculturists through the Rehabilitation Finance Corporation and the National Development Corporation, and it has encouraged the establishment of rural banks. The Central Bank of Chile allocates part of its profits for agricultural financing. In Pakistan, the State Bank Ordinance of 1955 was passed to permit the State Bank of Pakistan to grant loans up to 15 months to cooperative societies for financing agriculture. The central bank may also rediscount agricultural bills for marketing crops or for agricultural development up to a maximum period of five years.

In many countries, the capital of government-owned institutions has been increased and conditions of lending have been changed to make them more effective. The Agricultural Bank in Bolivia was reorganized in 1954, with authority to grant mortgage loans up to 10 years and to grant credit to small farmers up to 2 years. In Iraq in 1952, the nominal capital of the Mortgage Bank and the Agricultural Bank was increased from ID 1 million to ID 2 million, and that of the Crédit Mobilier from ID 250,000 to ID 1 million. At the same time, the Mortgage Bank of Iraq was authorized to extend 8-year loans, whereas previously loans had been for 4 years; and the maximum amount of any individual loan of the Crédit Mobilier was raised from ID 100 to ID 1,000. In Southern Rhodesia, the Land Bank Act was amended in 1946 to increase the maximum size of individual loans and to extend the maximum period of the loan to 30 years; the Act was again amended in 1953 to make for more efficient administration and the recovery of advances. The capital of the Land and Agricultural Bank in Northern Rhodesia was increased from £650,000 to £1 million in 1954–55. The Government of Kenya in 1954 doubled the capital of the Land and Agricultural Bank of Kenya (established in 1931) from £750,000 to £1.5 million. The ordinance governing the Land Bank of Tanganyika was amended in 1954 to permit the increase of its capital through larger borrowing powers. In the same year, the capital of the Agricultural Credit Bank of Trinidad and Tobago was increased by BWI$720,000, to BWI$4.7 million.

The effectiveness of attempts to increase the supply of institutional credit can be judged by comparing the actual rates of growth in real terms (i.e., at constant prices) with the desired rate of growth. The desired rate of growth is a function of three factors: the present level of institutional credit in the total supply of credit in the unorganized money market; the level (expressed as a percentage of the total) which the supply of institutional credit should reach; and the number of years in which the target is to be achieved. In Table 7, the desired rates of growth have been computed with different assumptions regarding each of the three factors listed above. The supply of institutional credit in the unorganized money market of most underdeveloped countries is probably less than 10 per cent of the total. If the objective is that institutional credit should amount to 50 per cent of the total in 10 years, the required rate of growth of institutional credit would be about 20 per cent per annum.

When the data on the supply of known institutional credit (Table 9) are deflated by the cost of living indices, it is found that the rate of growth of institutional credit since the war39 has approximated or exceeded 20 per cent per year only in 4 countries (Ceylon, Iran, Panama, and Venezuela) out of 22. In 9 others (Burma, Colombia, El Salvador, Guatemala, Indonesia, Nicaragua, Peru, the Philippines, and Thailand), the rate of growth was between 10 and 15 per cent, while in 5 (Brazil, Costa Rica, Ecuador, Mexico, and Paraguay), it was 5 per cent or less. In 4 countries (Bolivia, Cuba, the Dominican Republic, and Lebanon), the rates were negative.

If, however, the criteria are relaxed, so that either the time period is increased from 10 years to 20 years or the level which institutional credit should reach is lowered to 40 per cent, the rate of growth of institutional credit in most countries in recent years can be looked upon as satisfactory. Of course, for countries where the present level of institutional credit is much less than 10 per cent of the total, the recent rates of growth would be unsatisfactory on either hypothesis.

Outline of a Program for Lowering Interest Rates

Any program to bring down interest rates in unorganized money markets must be comprehensive and should be guided by the principle that interest rates can be lowered only by reducing the demand for loanable funds as well as by increasing the supply.40 The demand for loanable funds for financing consumer expenditures can be reduced by changing social habits and concepts of acceptable standards of well-being. India has passed a law limiting the amount of expenditures which may be incurred for religious and social occasions. Such laws will not prevent people who are bent on spending money for such purposes from doing so; but it is believed that the masses, who are forced by custom to maintain levels of expenditure much above their income, will welcome this law and use it as an excuse to cut unnecessary consumption expenditure.

A reduction in borrowing for productive purposes may not be desirable, especially as the amount of self-financing which can take its place is negligible. Such borrowing can be reduced in the long run only through an increase in savings from higher agricultural output and income. It is not sufficient that the ability of the farmer to save be increased. The willingness to save must also be created. The problem of cheap agricultural credit is inseparable from the whole problem of agricultural development, including such measures as increasing the use of fertilizers and proper seeds; making available adequate marketing facilities, including proper grading, transportation, and storage of crops; and providing an efficient agricultural extension service.

There is no question that merely increasing the supply of loanable funds without reducing or limiting the demand will not solve the problem of high rates of interest. Experience in many underdeveloped countries, especially in Southeast Asia, indicates that an increase in supply merely stimulates demand (mainly for financing consumption) and does not lower the general level of interest rates. Thus a committee on rural indebtedness in Malaya stated:

Legislation to control usury is rarely effective because both the borrower and the lender usually combine to render it inoperative. If the borrower is to be protected from the effects of usury, the most effective way will be by education which will impress upon him the difference between wise and foolish borrowing. The mere provision of an alternative source of credit at a cheaper rate will not of itself solve the problem by eliminating the usurious money-lender. It may even aggravate the problem by supplying an additional source of credit. The cure for high rates of borrowing is to be found more in the borrower than in the lender.41

Even if it is true that the cure for high rates of interest is to be found more on the demand side than on the supply side, the supply of credit should also be increased.42 Supply should be increased in such a way that legitimate credit needs are met at cheaper rates without encouraging borrowing for consumption. This can be achieved by increasing the supply of institutional credit while at the same time taking steps to discourage borrowing from noninstitutional lenders. In this connection, it could be argued that legislation regarding moneylenders which has had the effect of drying up noninstitutional credit may be a blessing in disguise—although in a manner different from that intended by legislators.

Increasing the supply of institutional credit is a difficult problem, but the efforts of governments have had a fair degree of success. One problem is that of getting the commercial banks to lend more to agriculture. This problem cannot be solved merely by opening more branches, because even at present agriculturists who are fairly close to the big cities are as isolated from the organized money market as others living some distance away from the cities. The opening of more bank branches is desirable, but the branches’ business will as likely as not be confined to financing local retail and wholesale trade.

One way of inducing the organized financial institutions to lend more to agriculture is by making agriculturists more creditworthy and generally reducing the risks of lending by lessening the impact of some of the natural calamities (floods, plant and animal diseases); improving the human factor, i.e., reducing carelessness and increasing honesty; reducing the uncertainties of the market through crop insurance, stabilized agricultural prices, etc. The lenders might also take certain steps, such as spreading loans between different types of borrower and region and supervising the use of loans for productive purposes.43

Another way of encouraging institutional lending is by government guarantees of agricultural loans. In Egypt, half of the capital of LE 1,000,000 of Crédit Agricole d’Egypte was subscribed by the Government, and the commercial banks were induced to subscribe to the other half by a government guarantee of a dividend of 5 per cent on shares; however, no guarantees were given of the principal. In British colonial Africa, the rates charged by commercial banks on loans (though small in size) to cooperative societies are lower than those charged on commercial loans, because of the government’s guarantee. Another approach has been adopted in Mexico where the central bank has encouraged commercial bank financing of certain crops by agreeing to consider such loans as part of bank reserves.

One difficulty which arises in the attempt to increase the supply of institutional credit and to lower rural rates of interest is the nature of the land reform program in a number of underdeveloped countries, especially in Asia. In these countries, laws have been passed to prevent agricultural land from falling into the hands of moneylenders and other nonagriculturists. This means that the use of land as collateral to obtain low interest loans is automatically denied to agriculturists. One way of solving the dilemma created by not wishing land to fall into the hands of loan sharks and usurious moneylenders and yet wanting the agriculturists to capitalize on their limited assets—land—is to follow the practice adopted in Egypt. Egypt has a “Five Feddan Law” which prevents expropriation of land from farmers owning five feddans or less (a feddan is roughly equal to an acre). Exemptions from this law have been given, however, on loans granted by the Crédit Agricole d’Egypte, which charges low rates of interest. Other countries therefore might consider granting exemption from such laws to special financial institutions, such as cooperatives, which are prepared to grant loans at low interest rates.

Although some authorities and some writers on the subject may be more ambitious, it seems prudent to recognize that in the nature of things the average rate of interest will be higher in an underdeveloped country than in a more developed country, and that the rates in the unorganized sector will be higher than in the organized money market. This suggests that attempts to reduce the already comparatively low rates charged by cooperative societies are not warranted.44 Furthermore, it appears that the rates charged by governments and government-owned agricultural banks are often much lower than warranted. It would be better to increase the supply of institutional credit by ploughing back the earnings obtained by charging higher interest rates than to give tremendous windfall benefits to a few borrowers. Thus the average rate of interest in the unorganized money market could be lowered more rapidly.

There are, in fact, disadvantages in supplying institutional credit to the farmers at too low a rate. A report on agricultural credit in the Arab states, although expressing the view that rates of interest should be reasonably low, states, “Although low interest rates have the advantage of making credit cheaper to farmers and consequently increasing his income, yet they might encourage the farmers to use their loans extravagantly and unproductively with the consequence that when the loans fall due they are unable to honor their obligations.”45

The exceptionally high interest rates quoted in Table 11 in the Appendix are not alarming as long as their quantitative importance is small. Even in the more developed countries, high rates on loans of insignificant importance are to be found. In the United States, the legal maximum and actual rate charged on personal loans by finance corporations is 2½ per cent per month or 30 per cent per annum in many states, for example in Maryland and Virginia. In France, rates for installment credit are 18.55 per cent for 4 H.P. Renault cars, 30.80 per cent for radios, and as high as 40 or 50 per cent on some installment credit sales.46 The weighted average rate in the unorganized money market in most underdeveloped countries is probably in the neighborhood of 30 per cent per annum. A reduction to a level of 18 to 24 per cent within the next few decades would be an achievement.

Table 11:Moneylenders’ Rates of Interest1(In per cent per annum)
Lower Exceptional2Usual2Occasional2Higher Exceptional2
AFRICA
Nigeria
(1)500
(2)45150
ASIA
Burma
(1)12–1524–3650–100400–1,800
(2)12–1824–3650–60100–250
Cambodia36–84120
Ceylon
(1)13.518–2467100
(2)66–1818 and above
(3)10–1517--2027–3650
(4)600
China
(1)20–3040 and above
(2)24–4872–96100–200 and above
India
(1)12–50300–400
(2)25–50
Indonesia50200500–600
Japan1010–1515–2020 and above
Malaya100
Pakistan
(1)30300
(2)25–30150
Philippines
(1)60–200300
(2)25–30100–200400
(3)20300
Thailand
(1)3660
(2)18 and below25–3040–6092
Viet-Nam
(1)2036–100
(2)50–100240–3003,650
LATIN AMERICA
Colombia18–2448
Cuba
(1)1224–30
(2)8–1824–40
Guatemala8–12100
Haiti100over 100
Honduras24–36200–600
Mexico60300–1,200
MIDDLE EAST
Egypt1525–40200
Iran200775
Iraq
(1)20–50100
(2)100200–400700
Israel
(1)140
(2)30
(3)18–24
(4)3080–90
Jordan
(1)60
(2)20–40exorbitant
Lebanon
(1)50–100
(2)22–2433
Sudan, Northern100
Syria
(1)9–2040–45150
(2)1840

Data refer to postwar years unless otherwise indicated in the section, “Descriptive Notes and Sources of Data, by Area,” below.

For description of term, see text, p. 102.

Data refer to postwar years unless otherwise indicated in the section, “Descriptive Notes and Sources of Data, by Area,” below.

For description of term, see text, p. 102.

Summary

The unorganized money market is generally larger than the organized money market. Its nature and working are quite different from that of the organized money market. Noninstitutional sources of supply, such as moneylenders, landlords, shopkeepers, relatives, and friends, are more important than credit institutions and thus business is carried on in a personal way and not subjected to standardized procedures.

The direct connection between the two money markets is rather poor and is less close than the connection between the organized money markets in underdeveloped countries and world money markets. The organized and unorganized money markets are, however, loosely connected through large exporters, wholesalers, and landlords who borrow in the organized market and carry out some relending in the unorganized market.

Interest rates in the unorganized money market range from fairly low rates charged by the cooperative credit societies to the very high and exorbitant rates charged by loan sharks to borrowers with poor credit ratings or to those in urgent need of funds. The major portion of the loans, however, are granted at rates in between these two extremes. It is estimated that in the majority of countries the weighted average rate of interest in the unorganized money market must lie between 24 per cent and 36 per cent per annum.

The high rates of interest prevailing in the unorganized money market have been a heavy burden to the agriculturists. Annual interest payments have been fairly large in relation to the net income of the farmer, thus reducing his ability to make improvements on the land.

The high rates of interest are due to both demand and supply factors and stem from the economic and social conditions prevailing in under-developed countries. The need for funds by agriculturists is more urgent than the need of borrowers in the organized money market, because the low level of agricultural income makes it practically impossible for the farmer to set aside funds for self-financing. The supply is small because of the low savings, even of those in the upper income brackets, and the lack of institutional arrangements to mobilize and channel the available savings into the unorganized money market. It seems, however, that the exorbitant rates of interest charged by loan sharks and unscrupulous moneylenders are due mainly to the semimonopolistic position occupied by them.

Generally speaking, there are no seasonal and cyclical fluctuations in interest rates, such as occur in the organized money market. The rates charged by moneylenders and by credit institutions do not vary with the cycle. The quantities lent, however, have varied, with the supply from credit institutions expanding more rapidly in the boom and contracting much faster in the slump. Since the rate charged by credit institutions is much lower than the rate charged by the moneylenders, the weighted average rate of interest in the unorganized money market has fallen in the boom and risen in the slump; this is the opposite of the movements in the organized money market.

Governments have attempted to influence the cost and availability of credit in the unorganized money market through direct lending to the agriculturists and by controlling the rate of interest and the conditions of moneylending. Although some success has been achieved, these measures, generally speaking, have not as yet lowered rates of interest, partly because of inflationary pressures created by deficit financing for such lending and other expenditures and partly because controls have been evaded.

In view of the fact that the unorganized money market is larger than the organized money market, and since the two markets have not been closely connected, the use of orthodox monetary policy as an instrument of economic policy has very limited possibilities in under-developed countries. The cost and availability of credit in the unorganized money market can be influenced by the central bank either by improving the link between the two money markets or by having a large amount of credit supplied by it directly or indirectly through credit institutions and even through moneylenders. There are inflationary dangers in the latter approach, but the art of central banking in underdeveloped countries is to be able to steer the monetary system into a position of dependence on the central bank without inflation, so that when inflationary pressures arise, the authorities can cut credit not only in the organized money market but also in the unorganized money market.

APPENDIX

The eight publications listed below have been used extensively as sources of some of the data in the four tables in this Appendix (Tables 811). In the notes to the tables, these publications are identified briefly by “keys,” which are shown in brackets before the detailed citations below. For other sources that have been used, complete citations are given in the notes to the tables.

[Beckhart] B. H. Beckhart, ed., Banking Systems (New York, 1954).

[Conference, Beirut] Agricultural Credit Conference, Beirut, 1953, Agenda, Working Materials, and Proceedings (mimeographed).

[Conference, California] International Conference on Agricultural and Cooperative Credit, University of California, 1952, Proceedings (Berkeley, Calif., 1952), 2 vols.

[ECAFE, Mobilization] Economic Commission for Asia and the Far East, Mobilization of Domestic Capital in Certain Countries of Asia and the Far East (Bangkok, 1951).

[Jacoby] Erich H. Jacoby, Agrarian Unrest in Southeast Asia (New York, 1949). [Johnson] V. Webster Johnson and Edwin C. Johnson, Farm Credit Activities in Selected Countries with Reference to Credit Programs for Underdeveloped Areas (For the Ford Foundation, the International Bank for Reconstruction and Development, the Foreign Operations Administration, and Harvard University, mimeographed, September 1954).

[UN, Land] United Nations, Land Reform: Defects in Agrarian Structure as Obstacles to Economic Development (New York, 1951).

[UN, Progress] United Nations, Progress in Land Reform (New York, 1954).

Table 8.Descriptive Notes and Sources of Data, by Country
The sources listed have been used mainly for data on agricultural or rural indebtedness. Other data have been taken, wherever possible, from International Monetary Fund, International Financial Statistics (Washington), and United Nations, Statistics of National Income and Expenditure (Statistical Papers, Series H, New York).
Brazil. Rural indebtedness is estimated as 16 per cent (the ratio of rural credit to gross value of rural production reported in the source, given below) of the value of income originating in the agricultural sector. Source: Alexandre Kafka, “Brazil,” in Beckhart, p. 110.
Burma. Sources: Report of the Burma Provincial Banking Enquiry Committee, 1929–30 (Rangoon, 1930); V.K.R.V. Rao, The National Income of British India, 1931–32 (London, 1940), pp. 232–33.
Cambodia. Currency in circulation as of November 1955. Sources: Economic Commission for Asia and the Far East, Economic Bulletin for Asia and the Far East (Bangkok); Thonni Thoutch, “On the Possibilities of Agricultural Credit in Cambodia and on the Problems Which Cambodia Must Face in Order to Ensure Adequate Agricultural Financing,” in Conference, California, p. 633.
Ceylon. The value of rural indebtedness for 1951, probably an underestimate, is based on information gathered from lenders, which shows outstanding advances by registered moneylenders and pawnbrokers only; the total of such advances during the year was Cey Rs 90 million. The value of rural indebtedness for 1950–51 is based on information gathered from borrowers in a survey covering 108 villages with 22,082 families, with a total debt of Cey Rs 1.75 million. The per family indebtedness for the whole agricultural population is assumed to have been the same as for the sample, with the further assumptions that the average family had 4.61 members and the distribution of population between the urban and rural sectors in Ceylon was the same in 1950 as in 1946. Sources: For 1951, Department of Census and Statistics, Census of Financial Institutions, 1952 (Colombo, 1954); for 1950–51, Department of Census and Statistics, Final Report on the Economic Survey of Rural Ceylon, 1950–51 (Colombo, 1954), p. 44.
Colombia. Agricultural indebtedness is based on the statement in the source that the agricultural loans of the Agricultural Bank, which in October 1952 amounted to Col$220 million, account for more than half of all credits granted to private agricultural producers. Source: Department of Commerce, Investment in Colombia: Conditions and Outlook for United States Investors (Washington, 1953), pp. 46–47.
Cyprus. Currency in circulation as of 1953. Source: Colonial Office, Digest of Colonial Statistics (London).
El Salvador. Agricultural indebtedness was estimated by applying to income originating in the agricultural sector the official estimate of the ratio of credit used in financing ten important crops to their total cost of production. Source: Economic Commission for Latin America, Agricultural Credit in El Salvador (UN Document E/CN.12/167/Add.2, New York, May 1, 1950), p. 50.
India. In the 1929–30 estimates, claims of the banking system and currency in circulation are as of 1930, and national income, which excludes Burma but includes Pakistan, is as of 1931–32; the estimate of loans and advances of the banking system is based on the loans and advances of the Imperial Bank of India in 1930, adjusted by reference to the ratio of such loans and advances to total scheduled bank loans and advances in January 1936. The 1951–52 estimates are derived from the findings of the All-India Rural Credit Survey that 0.9 per cent of total borrowings of cultivators were from commercial banks and the fact that the advances of all reporting commercial banks on June 30, 1951 totaled Rs 183 million.
Sources: For 1929–30, Indian Central Banking Enquiry Report, 1929–30 (New Delhi, 1931), and V.K.R.V. Rao, The National Income of British India, 1931–32 (London, 1940); for 1951–52, Reserve Bank of India, All-India Rural Credit Survey (Bombay, 1954), Vol. 2, pp. 167 and 181.
Japan. Agricultural income is assumed to be 20 per cent of national income. Sources: Hideo Tokoro, “Agricultural Credit in Japan,” in Conference, California, p. 844; Johnson, p. 18.
Jordan. Source: Economic Research Institute, “Report on Agricultural Credit in Jordan,” p. 11, in Conference, Beirut.
Lebanon. The 1951–52 estimates are based on the statement in the source that interest payments amount to one fourth of agricultural income and on the assumptions that half of total national income is agricultural income and the rate of interest is as high as 50 per cent.

Sources: For 1951–52, Joseph Abi-Fadel, “Agriculture and Agricultural Credit and Cooperatives in Lebanon,” in Conference, California, p. 903; for 1953, Economic Research Institute, “Report on Agricultural Credit in Lebanon,” p. 11, in Conference, Beirut.
Mexico. Agricultural indebtedness is based on an estimate in the source (given below) that loans granted by the National Bank for Ejidal Credit and the National Bank for Agricultural Credit combined provide about 10 per cent of total outstanding agricultural loans. Source: Margaret G. Myers, “Mexico,” in Beckhart, pp. 578-S1.
Pakistan. The figure of PRs 1,128 million is an estimate of rural indebtedness. Both estimates are based on the assumption that the per capita indebtedness recorded in the Punjab in 1951 also applied to Pakistan as a whole. Sources: Board of Economic Inquiry, Punjab, Report on the Need and Supply of Credit in the Rural Areas of the Punjab (Lahore, 1951), p. 7; Central Statistical Office, Pakistan Statistical Yearbook, 1952 (Karachi, 1954).
Syria. The estimate of agricultural indebtedness is based on the assumption that the ratio of agricultural credit supplied by official banks to total agricultural credit is the same as in Lebanon. The figures for agricultural income and national income are for 1953. Sources: Economic Research Institute, “Report on Agricultural Credit in Syria,” p. 8, in Conference, Beirut; Ministry of National Economy, General Monthly Bulletin of Current Statistics (Damascus).
Thailand. Percentages for 1934–35 are based on 1934–35 data for the value of agricultural indebtedness and on 1938 data for the other series. The estimate of rural indebtedness in 1952–53 for the whole of Thailand is based on a sample of 6,419 families, with the further assumption that the average family has 4 members. For this sample, the ratio of rural indebtedness to income originating from agriculture is 13.1 per cent, instead of 14 per cent. Sources: For 1934–35, Jacoby, pp. 233–36; for 1952–53, Ministry of Agriculture, Thailand Economic Farm Survey, 1953 (Bangkok, 1953).
Turkey. Source: Johnson, p. 9.
Table 9:Descriptive Notes and Sources of Data, by Area
The sources listed are in addition to International Monetary Fund, International Financial Statistics (Washington), and United Nations, Statistics of National Income and Expenditure (Statistical Papers, Series H, New York), which have been used wherever possible.
ASIA
Burma. The institutions included are the Government (loans granted) and commercial banks.

Source: Union Bank of Burma, Bulletin (Rangoon).
Ceylon. The institutions included are commercial banks, cooperative societies, the Agricultural and Industrial Credit Corporation, and the State Mortgage Bank. Agricultural credit outstanding of commercial banks for 1951, 1953, and 1954 was estimated from the ratios of loans and advances to agriculture to total loans and advances outstanding at the end of 1948–50. Loans outstanding to agriculture by the Agricultural and Industrial Credit Corporation were calculated from the average share of loans granted for agricultural purposes to total loans granted during 1947/48–1953/54.
Sources: Department of Census and Statistics, Statistical Abstract of Ceylon, 1951 (Colombo, 1951); Central Bank of Ceylon, Bulletin (Colombo); Cooperative Department, Administration Reports on the Working of Cooperative Societies (Colombo).
Indonesia. The institutions included are the Desa Bank, the Bank Rajkat Indonesia, the Bank Negara Indonesia, and government-owned pawnshops. Agricultural loans outstanding of the Bank Negara Indonesia for 1952 were estimated from the rate of increase between 1953 and 1954.
Sources: Bank Indonesia, Bulletin (Djakarta); Central Bureau of Statistics, Statistical Abstract, 1955 (Djakarta, 1955).
Pakistan. The institutions included are commercial banks, the Agricultural Development Finance Corporation, and the Industrial Finance Corporation. Source: State Bank of Pakistan, Bulletin (Karachi).
Philippines. The institutions included are commercial banks, pawnshops in Manila, the Rehabilitation Finance Corporation and (beginning with 1954) the Agricultural Credit and Cooperative Financing Administration, and rural banks. The 1955 data are as of September.

Sources: Central Bank of the Philippines, Statistical Bulletin (Manila), March 1955, and Annual Report, 1954 (Manila, 1955).
Thailand. The institutions included are primary cooperative societies and commercial banks.

Sources: Chamnian Saranaga, Chesada Chongchitara, and Songsang Bhindhuvatana, “Rural Cooperative Credit in Thailand,” in Conference, California, p. 978; Bank of Thailand, Current Statistics (Bangkok).
LATIN AMERICA
Bolivia. The institutions included are the Central Bank of Bolivia, mortgage banks, and the Agricultural Bank of Bolivia (new loans granted).

Source: Banco Central de Bolivia, Boletin (La Paz).
Brazil. The institutions included are the Bank of Brazil and commercial banks. Income originating from agriculture for 1953 and 1954 was estimated on the assumption that it represented the same percentage of total national income as in the period 1949–52. The data for 1954 are as of October.
Cowman. The institutions included are commercial banks and the Agricultural Credit Bank. The value of recorded institutional credit to agriculture for 1948, which represents the balance outstanding of loans and discounts to agriculture by commercial banks, was estimated from the ratio of new loans and discounts granted to agriculture to the total in the same year. Income originating from agriculture for 1953 and 1954 was estimated on the assumption that it represented the same percentage of total national income as in the period 1950–52.

Source: Banco de la República, Revista (Bogotá).
Costa Rica. The institutions included are the Central Bank of Costa Rica and rural cooperatives.

Source: Banco Central de Costa Rica, Revista (San José).
Cuba. The institutions included are the member banks of the National Bank of Cuba. The 1954 data are as of September.

Source: Banco Nacional de Cuba, Estadisticas Monetarias y Bancarias (Havana).
Dominican REPUBLIC. The institutions included are commercial banks and the Industrial Credit Bank. Agricultural credit outstanding of the Industrial Credit Bank was estimated from the ratio of agricultural credit to total credit granted in the years indicated.

Source: Banco Central de la República Dominicana, Boletín Mensual (Ciudad Trujillo).
Ecuador. The institutions included are private banks (including the Institute of Agricultural Credit, which began operations in 1949) and development banks (credit granted). For 1952, 1953, and 1954, income originating from agriculture was estimated on the assumption that it represented the same percentage of total national income as in 1950.

Source: Banco Central del Ecuador, Boletín (Quito).
El Salvador. Recorded institutional credit to agriculture refers to credit granted to private banks by the Central Reserve Bank of El Salvador.

Source: Banco Central de Reserva de El Salvador, Revista Mensual (San Salvador).
Guatemala. The institutions included are commercial banks, the National Agricultural Bank, the National Mortgage Bank, and the Institute for the Development of Production. For 1952, 1953, and 1954, income originating from agriculture was estimated on the assumption that it represented the same percentage of total national income as in 1949.

Source: Banco de Guatemala, Boletín Estadístico (Guatemala City).
Honduras. The institutions included are commercial banks and the Development Bank. Income originating from agriculture for both 1954 and 1955 was estimated on the assumption that it represented the same percentage of total national income as in the period 1950–52.

Source: Banco Central de Honduras, Boletín Mensual (Tegucigalpa).
Mexico. The institutions included are private institutions, national institutions, and the Bank of Mexico. For 1953 and 1954, income originating from agriculture was estimated on the assumption that it represented the same percentage of total national income as in the period 1948–50.

Source: Banco Nacional de Mexico, Review of the Economic Situation of Mexico (Mexico, D.F.).
Nicaragua. The institutions included are commercial banks, the National Bank of Nicaragua, and the Mortgage Bank.

Source: Banco Nacional de Nicaragua, Revista Trimestral (Managua).
Panama. The institutions included are private banks (branches of U.S. banks, a French bank, and a small locally owned bank) and government banks (the National Bank of Panama, the Savings Bank, and three small provincial banks). Income originating from agriculture for 1952 was estimated on the assumption that it represented the same percentage of total national income as in 1950. The 1952 data are as of September.

Source: Dirección de Estadística y Censo, Estadística Panameña (Panama).
Paraguay. The institutions included are the Central Bank of Paraguay and private banks,

Source: Banco Central del Paraguay, Revista (Asunción).
Peru. The institutions included are commercial banks, savings banks, and the Central Reserve Bank of Peru.

Source: Banco Central de Reserva del Peru, Boletí n (Lima).
Venezuela. Only the Central Bank of Venezuela is included.

Source: Banco Central de Venezuela, Boletí n (Caracas).
MIDDLE EAST
Egypt. The institutions included are cooperatives, the Agricultural Credit and Cooperative Bank, and the Agricultural Mortgage Bank.

Source: Paul Fankhauser, “The Cooperative Movement in Egypt,” in Conference, Beirut.
Iran. The institutions included are Bank Melli Iran and rural banks Source: Ahmad Houman, “The Present Organization of Agricultural Credit and the Condition of Farmers in Iran,” in Conference, California, pp. 777–84.
Iraq. Only the Agricultural Bank of Iraq is included. All data are for years ended March.

Sources: Agricultural Bank of Iraq, Annual Reports (Baghdad).
Lebanon. The institutions included are cooperatives and the Société du Crédit Agricole et Industriel du Liban. Income originating from agriculture for 1952 was estimated on the assumption that it represented the same percentage of total national income as in the period 1948–50.

Source: Economic Research Institute, “Report on Agricultural Credit in Lebanon,” p. 10, in Conference, Beirut.
Syria. The institutions included are commercial banks and the Agricultural Bank of Syria.

Source: Directorate of Statistics, Statistical Abstract of Syria, 1954 (Damascus, 1955).
Table 10:Sources of Data, by Area
AFRICA
Most of the information on the African countries in this table was drawn from W. T. Newlyn and D. C. Rowan, Money and Banking in British Colonial Africa (Oxford, 1954). Additional sources are as follows:
Libya. Conference, California.
Nigeria. International Bank for Reconstruction and Development, The Economic Development of Nigeria (Baltimore, 1955).
ASIA
Burma. ECAFE, Mobilization; Union Bank of Burma, Bulletin (Rangoon). Cambodia. Conference, California; UN, Progress, pp. 220–22.
CEYLON. ECAFE, Mobilization.
India. ECAFE, Mobilization; Reserve Bank of India, Banking and Monetary Statistics of India (Bombay, 1954).
Indonesia. Conference, California; Johnson.
Japan. Conference, California; UN, Progress.
Pakistan. Ministry of Finance, White Paper on the Budget of the Government of Pakistan for 1955–56 (Karachi, 1955); State Bank of Pakistan, Bulletin (Karachi), March 1954.
Philippines. Conference, California; Central Bank of the Philippines, Annual Reports (Manila).
Thailand. Conference, California; ECAFE, Mobilization.
Viet-nam. Conference, California.
LATIN AMERICA
Bolivia. Conference, California.
Brazil. Alexandre Kafka, “Brazil,” in Beckhart.
Chile. UN, Progress, pp. 220–22.
Costa Rica and Cuba. Conference, California.
Ecuador. Conference, California; UN, Progress, pp. 220–22.
El Salvador. Conference, California; Economic Commission for Latin America, Agricultural Credit in El Salvador (UN Document E/CN.12/167/Add.2, New York, May 1, 1950).
Honduras. Conference, California.
Mexico. Conference, California; Margaret G. Myers, “Mexico,” in Beckhart.
Paraguay, Peru, and Uruguay. Conference, California.
MIDDLE EAST
Afghanistan. Conference, California.
Egypt. Conference, Beirut; Johnson.
Iran and Iraq. Conference, California; Conference, Beirut.
Israel. Conference, California; UN, Progress, pp. 220–22.
Jordan and Lebanon. Conference, Beirut.
Syria. Conference, California; Conference, Beirut.
Turkey. Johnson.
Table 11.Descriptive Notes and Sources of Data, by Area
AFRICA
Nigeria. (1) Prewar rate. Source: Report of the Commission on the Marketing of West African Cocoa (Cmd. 5845, London, 1938), para. 260. (2) The rate of 45 per cent is the maximum rate permissible on promissory notes under the Moneylenders Ordinance, No. 49 of 1949. Source: W. T. Newlyn and D. C. Rowan, Money and Banking in British Colonial Africa (Oxford, 1954), pp. 134 and 136. Newlyn and Rowan also report (p. 139) that in British West Africa as a whole rates up to 150 per cent are not uncommon.
ASIA
Burma. (1) Prewar rates. Source: Tun Wai, Burma’s Currency and Credit (Calcutta, 1953), pp. 53, 66, and 94–96. (2) Prewar rates. Source: Sir Bernard 0. Binns, Agricultural Credit for Small Farmers (FAO Development Paper No. 16, Rome, 1952), p. 19.
Cambodia. Source: Thonni Thoutch, “On the Possibilities of Agricultural Credit in Cambodia and on the Problems Which Cambodia Must Face in Order to Ensure Adequate Agricultural Financing,” in Conference, California, p. 633.
Ceylon. (1) Rates for 1934. Source: Ceylon Banking Commission, Report (Colombo, 1934), Vol. 1, pp. 44 and 50–51. (2) Rates for 1950–51; exclusive of hidden charges and effect of some of the malpractices. Source: Department of Census and Statistics, Final Report on the Economic Survey of Rural Ceylon, 1950–51 (Colombo, 1954). (3) Rates for 1951. Source: Department of Census and Statistics, Census of Financial Institutions, 1952 (Colombo, 1954). (4) Rate for 1953–54 on loans for cultivation and subsistence in the Hambantota cotton belt. Source: Cooperative Department, Administration Report on the Working of Cooperative Societies for 1954 (Colombo, 1955), p. 15.
China. (1) Prewar rates. Source: UN, Land, p. 41. (2) Prewar rates. Source: Institute of Pacific Relations, Agrarian China: Selected Source Materials from Chinese Authors (Chicago, 1938), pp. 188–99.
India. (1) Source: ECAFE, Mobilization, p. 39. (2) Source: Reserve Bank of India, All-India Rural Credit Survey (Bombay, 1954), Vol. 2, pp. 173–74.
Indonesia. The “higher exceptional” rates of 500–600 per cent are prewar. Sources: R. Sujudi, “Brief Outline of Smallholders’ Agriculture in Indonesia, Especially in East Java,” in Conference, California, p. 756; Mohamad Iskandar, “Summary of the Movement of Fishery Organizations in Indonesia,” in Conference, California, p. 768.
Japan. Prewar rates; based on a survey conducted in 1912. Source: Hideo Tokoro, “Agricultural Credit in Japan,” in Conference, California, p. 848.
Malaya. Source: International Bank for Reconstruction and Development, The Economic Development of Malaya (Baltimore, 1955), p. 79.
Pakistan. (1) Source: Report of the Pakistan Agricultural Inquiry Committee, 1951–52 (Karachi, 1953), p. 80. (2) The customary rate in’ the district of Gujrat was said to be 2 maunds of wheat for every Rs 100 lent. The price of wheat was about Rs 12–15 per maund; therefore the “usual” rate of 25–30 per cent. Source: Board of Economic Inquiry, Punjab (Pakistan), Report on the Need and Supply of Credit in the Rural Areas of the Punjab (Lahore, 1951), p. 31.
Philippines. (1) Prewar rates. Source: Jacoby, p. 188. (2) Sources: UN, Progress, p. 213; Conference, California, p. 471. (3) Source: Agricultural Credit and Cooperative Financing Administration, Annual Report, Fiscal Year 1953–54 (Manila, 1955), p. 1.
Thailand. (1) Source: Chamnian Saranaga, Chesada Chongchitara, and Song-sang Bhindhuvatana, “Rural Cooperative Credit in Thailand,” in Conference, California, p. 977. (2) Rates for 1952–53. Source: Ministry of Agriculture, Thailand Economic Farm Survey, 1953 (Bangkok, 1953).
Viet-nam. (1) Prewar rates. Source: Jacoby, pp. 147–48. (2) The “higher exceptional” rate of 3,650 per cent is based on extremely small daily loans at 10 per cent per day. Sources: UN, Progress, p. 26; Nguyen Quang Luu, “Some Aspects of the Problem of Agrarian and Cooperative Credit in Viet-Nam,” in Conference, California, p. 1015.
LATIN AMERICA
Colombia. Data relate to rates on mortgages in the general area of Bogota. Sources: Superintendencia Bancaria, Informe, 1954 (Bogotá, 1955), p. 22; Departamento Administrativo Nacional de Estadástica, Boletin Mensual de Estadística (Bogotá), February 1956, p. 104.
Cuba. (1) Source: Digby Solomon Espinosa, “Agricultural Credit in Cuba,” in Conference, California, p. 650. (2) Source: Philip J. Glaessner and G. Sterling Grumman, “Cuba,” in Beckhart, pp. 210 and 215.
Guatemala. Source: Economic Commission for Latin America, Agricultural Credit in Guatemala (UN Document E/CN.12/167/Add.3, New York, May 1, 1950), pp. 17 and 20.
Haiti. Source: United Nations, Domestic Financing of Economic Development (New York, 1950), p. 80, n. 44.
Honduras. The “higher exceptional” rates of 200–600 per cent are based on the fact that the lender was allowed to purchase the crop at one-fourth to one-half the price that would prevail at harvest and on the assumption that the loan was for six months. Source: Rene Cruz, “Agricultural Credit in Honduras,” in Conference, California, p. 715.
Mexico. Sources: Wendell C. Gordon, The Economy of Latin America (New York, 1950), p. 47; Margaret G. Myers, “Mexico,” in Beckhart, p. 578.
MIDDLE EAST
Egypt. Prewar rates. Source: Mohamed El Said Mohamed and Mahmoud El Shafie, “Development of Farm Credit System in Egypt,” in Conference, California, pp. 660 and 665.
Iran. Sources: “Journal of Conference,” p. 6, and Economic Research Institute, “Report on Agricultural Credit in Iran,” p. 8, in Conference, Beirut.
Iraq. (1) Source: Hasan Thamer, Problems of Agricultural Credit in Iraq,” in Conference, California, pp. 798–99. (2) Sources: “Journal of Conference,” p. 6, and Economic Research Institute, “Report on Agricultural Credit in Iraq,” p. 15, in Conference, Beirut.
Israel. (1) Prewar rate. Source: Yehuda Lowe, “Agricultural Credit in Israel,” in Conference, California, p. 803. (2) Prewar rate. Source: UN, Land, p. 38. (3) Source: Department of Commerce, Basic Data on the Economy of Israel (World Trade Information Service, Part I, No. 55–104, Washington). (4) Rates for 1955. Source: The Israel Economist (Jerusalem), December 1955.
Jordan. (1) Source: Zaki Abdo, “Agricultural Credit in Jordan,” in Conference, California, pp. 887–88. (2) Sources: “Journal of Conference,” p. 6, and Economic Research Institute, “Report on Agricultural Credit in Jordan,” p. 14, in Conference, Beirut.
Lebanon. (1) Source: Joseph Abi-Fadel, “Agriculture and Agricultural Credit and Cooperatives in Lebanon,” in Conference, California, p. 903. (2) Source: Economic Research Institute, “Report on Agricultural Credit in Lebanon,” pp. 11–12, in Conference, Beirut.
Sudan, NORTHERN. Source: Martin W. Wilmington, “Aspects of Moneylending in Northern Sudan,” The Middle East Journal (Washington), Spring 1955, p. 142.
Syria. (1) Prewar rates. Source: UN, Land, p. 38. (2) Source: Economic Research Institute, “Report on Agricultural Credit in Syria,” p. 8, in Conference, Beirut.

Mr. U Tun Wai, Assistant Chief of the Finance Division, was educated at the University of Rangoon, the University of Bombay, and the Yale Graduate School. Formerly Lecturer in Economics at the University of Rangoon and economist in the secretariat of the Economic Commission for Asia and the Far East, he is the author of Burma’s Currency and Credit.

U Tun Wai, “Interest Rates in the Organized Money Markets of Underdeveloped Countries,” Staff Papers, Vol. V (1956–57), pp. 249–78.

In India it was estimated by the Provincial Banking Enquiry Committees in 1930 that unproductive debt constituted about 60 per cent of total debt in Madras and 70 per cent in Bengal, the United Provinces, and Bombay. In Pakistan, the Board of Economic Enquiry estimated in 1951 that 70 per cent of the rural debt of the Punjab was for current domestic requirements.

Even in the organized money markets the commercial banks depend on the personal assessment by the manager of the creditworthiness of the borrower. However, these assessments are translated into financial terms and the credit rating of a borrower is not impaired by the transfer of a branch manager.

For most underdeveloped countries, agricultural indebtedness comprises the major portion of rural indebtedness. Thus, for example, in Pakistan, according to the survey conducted by the Board of Economic Enquiry in the Punjab in 1951, agricultural indebtedness amounted to about 80 per cent of rural indebtedness.

For a detailed analysis of the data available for making this comparison and for a comparison between agricultural or rural indebtedness and currency circulation, see Appendix, Table 8. The data for Burma, Ceylon, El Salvador, India, Pakistan, and Thailand are based on farm surveys or special surveys, and may therefore be regarded as fairly reliable. The assumptions on which the calculations have been based are listed in the notes to Table 8. In assessing the significance of these calculations, it should be borne in mind that part of agricultural indebtedness is “dead-weight” debt, i.e., debt which the agriculturist can never hope to repay, and which would have been written off if it had been incurred in an organized money market. The importance of “dead-weight” debt is impossible to estimate accurately. It is probably less now than before the war, because of government measures which have scaled down the volume of agricultural indebted-ness and of favorable agricultural prices in some postwar years.

See U Tun Wai, op. cit., Table 2, p. 252.

The practice began with the partition of India when most of the commercial banks in Pakistan which were owned and operated by Indians left the country.

Cooperative Department, Administration Report on the Working of Cooperative Societies for 1954 (Colombo, 1955), p. 1.

See Marjorie Nicholson, Cooperation in the Colonies (Loughborough, England, 1953). Derived by taking membership in all societies as a percentage of total number of families estimated on the basis of four persons per family.

See United Nations, Progress in Land Reform (New York, 1954), p. 222.

It is open to question whether government-owned institutions (and also government lending) can be included in this category, especially since they are not dependent on the organized money market for funds. But insofar as governments borrow money in the organized money market, it may be argued that there is an indirect link.

It is not implied here that these institutions are subject to credit control by central banks.

In India, moneylenders as a whole obtained practically no finance from the commercial banks and there was no link as in Southeast Asia between the two money markets.

U Tun Wai, Burma’s Currency and Credit (Calcutta, 1953), p. 45.

See W. T. Newlyn and D. C. Rowan, Money and Banking in British. Colonial Africa (Oxford, 1954), pp. 138–39, and United Africa Company Limited, Statistical and Economic Review (London), September 1949, p. 51.

See International Bank for Reconstruction and Development, The Economic Development of Nigeria (Baltimore, 1955), p. 163.

See U Tun Wai, Burma’s Currency and Credit (Calcutta, 1953), pp. 93–94.

In India, about 30–40 per cent of the cultivators received government loans after a time lag of from one to three months, while in some districts about one fifth to one third of the loans were disbursed after a time lag of eight months or more. See Reserve Bank of India, All-India Rural Credit Survey (Bombay, 1954), Vol. 2, p. 205.

H. S. F. Goonewardena, “Some Problems of Agricultural and Industrial Credit in Ceylon,” Economic Commission for Asia and the Far East, Mobilization of Domestic Capital: Report and Documents of the Second Working Party of Experts (Bangkok, 1953), p. 195.

See “On the Establishment of Certain Small Loan Banks by Governments, with Special Reference to the Experience in Indonesia,” Economic Commission for Asia and the Far East, Economic Bulletin for Asia and the Far East (Bangkok), November 1951, pp. 41–47, and Central Bank of the Philippines, Annual Report, 1950 (Manila, 1951).

Thonni Thoutch, “On the Possibilities of Agricultural Credit in Cambodia and on the Problems Which Cambodia Must Face in Order to Ensure Adequate Agricultural Financing,” International Conference on Agricultural and Cooperative Credit, University of California, 1952, Proceedings (Berkeley, Calif., 1952), Vol. 2, p. 633.

Fluctuations in interest rates also arise from the method of borrowing in kind and repaying in money and vice versa when prices of commodities have changed between the time of borrowing and repayment. Since both types of borrowing exist, it is not possible to generalize about the nature of such fluctuations.

See W. T. Newlyn and D. C. Rowan, op. cit., pp. 160–61.

See Yehuda Lowe, “Agricultural Credit in Israel,” International Conference on Agricultural and Cooperative Credit, University of California, 1952, Proceedings (Berkeley, Calif., 1952), Vol. 2, p. 803.

It is possible, of course, that conditions in underdeveloped countries may change so slowly that rates of interest remain unchanged for many decades, and thus the duration of the short run is extended into a long-run period.

Department of Census and Statistics, Final Report on the Economic Survey of Rural Ceylon, 1950–51 (Colombo, 1954), pp. 46–47.

This does not necessarily mean that defaults in unorganized money markets are so numerous as to justify the high level of rates. In fact, the opposite view is propounded below.

International Conference on Agricultural and Cooperative Credit, University of California, 1952, Farm Credit in Underdeveloped Areas: A Summary Report of the Conference (Berkeley, Calif., 1953), p. 69.

United Nations, Domestic Financing of Economic Development (New York, 1950), p. 9.

If the rate of interest influenced the volume or value of defaults to any great extent, the system would be very unstable inasmuch as lenders would try to charge higher rates in order to cover defaults and this higher rate would tend to make the defaults larger, and so on.

This is not the same as defaults and only indicates tardy repayments.

See Economic Commission for Asia and the Far East, Mobilization of Domestic Capital: Report and Documents of the First Working Party of Experts (Bangkok, 1952), p. 122.

See Reserve Bank of India, All-India Rural Credit Survey (Bombay, 1954), Vol. 2, pp. 171–72, for details on how the moneylender in India insures repayment on unsecured loans.

Ibid., p. 174.

See United Nations, Progress in Land Reform (New York, 1954), p. 230.

See Reserve Bank of India, op. cit., p. 124.

Technical Meeting on Agricultural Credit for the Arab States, Near East, Beirut, 1954, Report (Food and Agriculture Organization, Rome, 1954), p. 19.

Cooperative Thrift, Credit, and Marketing in Economically Underdeveloped Countries (FAO Development Paper No. 34, Rome, 1953), p. 5.

Rates of growth of institutional credit, compound per cent per year, during some or all of the years, 1948–55. Since the cost of living index is not as responsive or free from the effects of price-controlled commodities as the index of rural or agricultural wholesale prices, the rates of real growth tend to be exaggerated.

A UN publication lists the following measures for reducing rates of interest: (1) Expand and improve existing credit and banking facilities; (2) augment supply of capital by fostering savings and investment habits; (3) reduce high risks of investment by curbing unsound investments and speculative activities and pursuing orderly development policies; (4) avoid inflationary techniques in financing development; (5) equity participation by government; (6) obtain foreign financing. See United Nations, Domestic Financing of Economic Development (New York, 1950), pp. 81–82.

Economic Commission for Asia and the Far East, Mobilization of Domestic Capital in Certain Countries of Asia and the Far East (Bangkok, 1951), p. 42, quoting from the Report of the Committee appointed to consider whether the machinery for agricultural credit in Malaya is adequate… and to consider… the problem of rural indebtedness (Kuala Lumpur, June 29, 1949).

Increasing the supply of institutional credit as one of the means of reducing interest rates has been emphasized in Economic Commission for Asia and the Far East, Mobilization of Domestic Capital in Certain Countries of Asia and the Far East (Bangkok, 1951), pp. 41–50.

This has been tried with fair success in Bolivia, Brazil, Costa Rica, Ecuador, El Salvador, Honduras, Mexico, Paraguay, Peru, Uruguay, and Venezuela, especially by credit institutions receiving financial assistance from the Government. It has generally not been tried at all in Asia and the Middle East, except to a small extent in the Philippines and Thailand.

In 1946, the Indian Cooperative Planning Committee recommended that every effort should be made to reduce the rate charged by cooperative societies so as not to exceed 6¼ per cent per annum.

Technical Meeting on Agricultural Credit for the Arab States, Near East, Beirut, 1954, Report (Food and Agriculture Organization, Rome, 1954), p. 14.

Pierre Cauboue, “Competition Among Banks in France and the Fixing of Their Rates,” Banca Nazionale del Lavoro, Quarterly Review (Rome), June 1955, p. 95.

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