Malcolm Harper notes that “old paradigm” rural credit, with subsidised interest rates, mainly to individual men, for medium and long terms, with single balloon repayments and no link to savings, has been increasingly replaced by “new paradigm” micro-finance; short term, initially in small sums, sustainable cost-covering interest rates, with frequent regular repayments, mainly to women in groups, with strict savings requirements and relatively high interest rates. He wonders, however, if micro-finance a suitable way of financing seasonal crop loans, or longer term farm investments such as tube wells or terracing?
There seems to be a mismatch between micro-finance and on-farm investments, not least in respect of interest rates. The cost of funds, that is the interest rate, must be far enough below the expected return from the investment to cover the risk of loss and to allow the owner a reasonable surplus. While many microenterprises show rates of return on capital in the range of 800%, farm enterprises generally average less than 100%. Can farmers afford microfinance?