ABSTRACT
We say that the credit market fails if poor people-whether farmers or microentrepreneurs-are unable to borrow for socially beneficial projects, that is, projects with an excess of social benefits over social costs. This can happen for any of four reasons:
1 no lender is willing (or legally permitted) to pass on the extra costs associated with lending to unknown customers in small quantities;
2 no insurer is willing to compensate for borrowers’ and lenders’ riskaversion (and for the presumed absence of collateral) by offering insurance against non-repayment due to natural hazards;
3 even if 1 and 2 are untrue, potential borrowers are unwilling to borrow because of risk-aversion although the expected value of their profits outweighs the expected cost of their investment, including interest and insurance payments;
4 social and private values of cost and benefit diverge because of externalities or otherwise, so that some projects which are socially profitable do not survive scrutiny on the basis of private costs and returns.
