C      E      A      L

Center for the Economic Analysis of Law

W A S H I N G T O N,  D C



     Creating a Legal and Regulatory Framework to Promote Access to Credit in Agriculture




                                                           Heywood W. Fleisig   

                                                                Nuria de la Peña   

                                                                           April 1995   






























Discussion Draft: November 29, 1995:  This draft is being circulated for review and comment.  Please do not cite or quote without the permission of the authors.  Thank you.



*       The views and interpretations expressed in this paper are those of the authors and do not necessarily represent the views and policies of The Center for the Economic Analysis of Law (CEAL); or of the World Bank, its Executive Directors, or the countries they represent. 


        Heywood Fleisig is the Director of Research at CEAL; Nuria de la Peña is an attorney and consultant to The World Bank.  The work set out in this paper was undertaken under the broad supervision of Jonathan Parker (LA3NR). It was written by Heywood Fleisig and Nuria de la Peña and draws on work done jointly with Juan Carlos Aguilar done under the supervision of Vicente Fretes-Cibils.  The authors are obliged to Jonathan Parker, Susannah Knaudt, and Philip Hazelton for their advice and guidance.  The authors thank, for their substantial intellectual contributions, Efraín Camacho, Ronald C.C. Cuming, Jose Luis Galindo, Alejandro Garro, Lance Girton, Kenneth Kletzer, Graciela Rodriguez-Ferrand, Stephen Salant, and John A. Spanogle.  In addition, the authors received much helpful advice and information from many Bolivians who agreed to be interviewed for this report. 



Executive Summary


i.          Improving access to credit in agriculture is often seen as a key element in rural development strategy -- because projects exist that could increase the incomes of farmers and other rural businesses if they only had access to credit.  Similarly, access to credit is often seen as an important tool in attacking rural poverty, not just because profitable projects exist that could raise income, but also because increasing access to credit would achieve other social objectives, such as improving the independence and self-reliance of the target groups, increasing agricultural self-sufficiency, or permitting the able rural poor to swiftly raise their earning prospects.


ii.         There has been much concern that formal sector institutions do not adequately deliver credit to farmers and other rural businesses, especially to the poor in rural areas.  Consequently, there has been much focus on institutional innovation that could improve the delivery of such credit. 


iii.         At first, multilateral lenders attempted to disburse these credit lines through state banks.  However, uncertain performance in reaching target groups combined with poor loan recovery rates led to a policy of disbursing through private lenders.  This improved the efficiency of these operations, as private lenders took great care to disburse only where loans could be collected; however, in most cases this improvement in efficiency took place at the expense of reaching the target groups -- the price of improved efficiency was that target groups had even less access to credit.


iv.        In Bolivia, legal, regulatory, and institutional features of the Bolivian economy limit formal sector institutions in their delivery of credit to agriculture and to the rural poor.  These features hamper innovative new institutions that aim at delivering such credit; they make it difficult for innovative institutions to form links with formal sector institutions to deliver such credit.



Problems in Laws and Regulations


v.         In Bolivia, several features of the legal system limit access to credit in agriculture:


·        Homestead and exempt property provisions prevent the rural smallholders, preeminently the poor, from using their small holdings as collateral or purchasing small parcels of land or small quantities of equipment on credit


·        Usury laws drive informal lenders underground, so that poor rural borrowers fail to get the benefits of competition or proper regulation of lending practices


·        An age of majority of 21 makes it impossible for the large number of poor under that age to sign lawful contracts to borrow


·        The implicit requirement that loan contracts be in writing makes a lawful contract impossible for citizens not literate in Spanish, often the rural poor


·        A defective framework for secured transactions makes it difficult for formal sector lenders to provide supplemental financing to natural conduits of rural credit, especially dealers and suppliers of farm inputs.  In additional, the same defects limit the ability of NGO lenders to refinance their portfolios of loans with formal sector lenders.



Problems in Institutions


vi.        Several institutional features limit access to credit:


·        Legal registries are expensive to search, not sufficiently open to public access, and technically weak.  This makes it expensive to register security interests in small real estate holdings, movable property, accounts receivable and chattel paper that will be essential in opening channels of credit to rural borrowers. Where land holdings are small and of low value, these costs will make registration of security interests prohibitively expensive and drive the poor out of the credit market.


·        Credit reporting systems are just beginning and banks have no systems for making credit decisions based on past lending performance, so borrowers who are not well known outside their areas, especially the poor, have no way to gain access to credit by publicizing a strong payment performance


·        National identity cards are typically required by formal sector lenders, but they are difficult and expensive to get for those who have not served in the Army or who do not have birth certificates, critically limiting action by single women heads of households


·        Defects in secured transactions law combine with usury laws to prevent the open operation of competing pawnshops


·        Personal lending is not yet subject to the supervisory norms that would permit loans to borrowers without real estate to be monitored prudently


Other Explanations?


vii.        Other explanations have been offered for lack of access to credit in agriculture in Bolivia.  The paper explains that these explanations are either less important than problems related to the secured transactions framework or inapplicable to Bolivia situation; among these are:


·        Insufficient savings

·        Macroeconomic instability

·        Excessively restrictive bank practices and regulations

·        Absence of bank interest in small loans



Economic Implications and Options for Solution


viii.       In each section, the paper discusses the economic implications of these legal and institutional restrictions.  It sets out, for discussion and consideration, some options for action by the government, by the Superintendent of Banks, and by NGOs for addressing these problems. 



Implications for Bank Operations


ix.        While major reforms will require legal and substantial institutional change, existing Bank operations might be modified to better achieve their targets under existing laws; such revamped operations might reach target groups through:


·        Mortgages on land holdings between 50 and 100 hectares

·        First trust loans on land holdings below 50 hectares

·        Personal loans to those with land holdings under 50 hectares

·        Loans to NGO lenders secured by the portfolio of NGO loans

·        Loans to dealers in agricultural inputs and equipment secured by their accounts receivable

·        Loans to cooperatives, secured by warehouse receipts, to refinance credit extended to members owning less than 50 hectares

·        Loans to finance inventory of equipment and input dealers that sell to farmers with holdings under 50 hectares