Question

Identify four (4) main market failures in the agricultural credit market that make agricultural financing a challenge in developing countries. Explain how these market failures can be solved.

Answer 1

The four main market failures in the agricultural credit market are as follows-

• Imperfect information among the lender and the borrowers - The farmers often borrow money for consumption purposes rather than an investment and thus there are high chances that the farmers may default. As a result of which there is a market failure as the lenders cannot identify the defaulters from a genuine one.
• Lack of property rights - The farmers in developing countries do not own any property rights to the land they use for agriculture and hence it cannot be used as a collateral.
• Lack of organised credit facilities - In rural parts, most of the lenders are unauthorised private lenders who charge large sum of interests from the farmers.
• Problems with collaterals - Poor farmers in developing countries do not own any valuables which is why they do not have any long term assets to keep as a collateral against the loans.

Solutions to these market failures-

• Intervention of the government- The government can provide subsidized credits to the farmers to encourage more borrowings. The subsidies can also help in buying machineries to increase the production.
• Opening of credit institutions- Banking institutions can be opened up more in the rural parts to encourage the farmers to take loans from a recognised, government backed institutions rather than private ones. It will also reduce the high interests paid by the farmers.
• Setting price ceilings - In order to protect the farmers from the destructive market powers, the government can set a price ceiling to provide an incentive to the farmers.