3 Consumption Credit in Rural Financial Market Development

During the 1980s, there has been a fundamental shift from a supply-leading to a demand-oriented approach to the development of rural financial markets in developing countries. Dale Adams (1984) and his colleagues at Ohio State University provided increasingly persuasive evidence that the supply-leading approach to agri-cultural credit has failed. This approach was based on the assumption that the savings potential and the supply of finance in rural areas was insufficient for setting development in motion. Therefore, it was suggested to inject cheap funds from government and external sources into rural areas, regularly targeted at specified groups for predetermined productive purposes (investments, fertilizer, seeds, feed, etc.). Specialized, often state-owned agricultural banks, were established with the sole purpose of channelling production credit to a limited clientele. With many of these financial institutions failing, attention has shifted to building financial markets based on rural clients ’ demand. The rationale of providing credit for production purposes was simple: credit, used to enhance the productive capacity of the borrower, will increase his future income, which, in turn, will allow him to pay interest and repay the loan. The actual performance of agricultural credit programs in many developing countries, particu-larly in Sub-Saharan Africa, seems to suggest that borrowers failed to follow this rationale on both accounts: the economic efficiency of credit use has often been low; the repayment performance has been poor. Many agri