Microfinance in Colonial India

Microfinance is viewed as a major innovation which will decrease cultivators ’ reliance on moneylenders. Two defining characteristics are the elimination of collateral and collective liability for debt repayment. But moneylenders in colonial India operated similarly: credit was based on personal reputation, and the extended family and caste were held responsible for repayment. This paper shows that rural credit markets in colonial India were large, competitive and efficient. Indian agricultural productivity stagnated during the colonial period due to a lack of agricultural investment, but this analysis suggests it not due to a lack of credit. Indian cultivators spent large sums on ceremonial expenditures such as weddings and funerals. I estimate that agricultural investment could have increased 76 percent if these expenditures were eliminated. If similar factors remain important in India, which it appears they do, institutionalized microcredit will not have significant long run effects on development