Transaction Cost of Agricultural Lending in Developing Countries

Abstract

This paper reviews recent cross-country evidence on the costs of financial intermediation of about twenty banks in six developing countries: Bangladesh, the Philippines, Honduras, the Dominican Republic, Togo and Niger. The results point out the high loan administration costs of agricultural loans, particularly in specialized government institutions. More importantly, the bank's performance in loan recovery appear as a key factor in determining the effective costs of agricultural lending. A trade-off appears to exist between resources allocated to loan processing on the one hand, and loan recovery performance and effective costs of lending on the other hand. The analysis emphasizes the need to appropriately measure loan delinquency, and to reflect the expected loan losses in the accounting provisions of the institutions.