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For decades the poor in developing countries were essentially shut out of credit and savings services. Because the poor did not meet the traditional criteria for borrowing, financial institutions perceived them as bad credit risks. More recently, development practitioners have come to see that the poor can indeed make effective use of credit to raise their incomes and get access to more food and other necessities. In fact, in some quarters microcredit is now seen as the solution to poverty.
Research conducted at International Food Policy
Research Institute IFPRI) shows, however, that although credit can be an important tool in the fight against poverty, credit alone cannot be guaranteed to:
- raise incomes,
- increase food security,
- and improve nutrition.
In this research report, Aliou Diagne and Manfred Zeller examine the case of
Malawi, where several institutions offer credit to poor, smallholder farmers to allow
them to buy fertilizer, seeds, and other inputs for growing maize and tobacco as a
way of helping raise incomes.
Surprisingly, they find that farmers who participated in these credit programs ended up with less net crop income than those who did not. Their results make clear that the conditions surrounding credit programs must be right—that is, they must reflect the actual opportunities and constraints faced by poor farmers—for credit to work effectively. For example, credit is not of much use in situations in which farmers have little access to roads, markets, health care, and communications infrastructure and are subject to drought that can wipe out their crops, as is the case in Malawi.
This research report reveals how complicated the task of effective rural development
can be, but it also points to concrete steps, in addition to offering credit services,
that governments and development organizations can take in their efforts to eradicate poverty and food insecurity. This research report should be of great significance to anyone interested in how rural finance can be made to work best for those in the most need—the poor and food insecure in developing countries. |
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