Rural Credit markets

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rrciri@neda.net wrote, in COMMUNITYDEVELOPMENTBANKING-L:

> Dear Friends
> There is a strong assumption that rural credit market in Iran, like
> other developing countries, are linked to factors of production
> market or goods market.

The assertion of the "standard" economic market model is that the demand
for any factor of produuction is "derived" from the demand for the products in
whose production that factor is used. This has been - and should continue to
be - a useful basis for modeling (or even just plain thinking about) any
factor market, whether it be for seed grain or wool thread or credit for
working capital, in any economy. It has certainly worked for me.

This assertion is NOT an assumption! It follows logically from the
market model. See any basic (western?) economics text.

Indeed, why would a firm - or a potential rural borrower - want to
borrow
in the first place? I think only if the market demand for the ultimate
product of their firm is insufficient to enable them to sell their production
at a price at least adequate to cover all costs of production - including the
cost of credit - plus a nominal wage for the owner and a nominal return for
the capital invested.

There ARE some possibly critical assumptions, for example, about
competition in the market for credit, widely available information about
product market conditions, and so forth. These assumed conditions might not
be fully met in rural areas in developing countries. That would not vitiate
the linkage between factor and product markets. It would just make prices
higher or credit less available than would otherwise be the case.

>
> I am really interested to know how is it possible to investigate this
> assumption empirically? Where should I start my investigation?

Assumptions, by their very nature, are not subject to empirical
investigation or test. Only the model based on the assumption can be tested.

It's not completely clear what question you want to investigate... But
you might begin by simply enumerating the local sources of credit and local
borrowers. You could then interview them, asking lenders whether product (or
factor) market conditions enter into their decision whether to lend, and
asking borrowers if product market conditions enter into their decision to
attempt to borrow.

Hope this is helpful

Karl

> Many, Many Thank.
> Mitra Moazzami
> Rural Research Center
> Tehran - Iran


================================================== ========================
Karl Radov Ekos Consultants: Applied Economics
Brookline, MA 02446 Market Research - Real Estate Analysis
kradov@world.std.com Community and Regional Development
** Whereof one cannot speak, thereof one must be silent **
================================================== ========================



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