Consumption Credit in Rural Financial Market Development

Cheap credit policies, often implying negative real interest rates, have been seen to be an important contributor to institutional collapse. This chapter discusses the functions financial markets have for rural households and addresses the difficulties in separating consumption and investment expenditure in rural households. Based on surveys in Cameroon and Benin, it shows that consumption purposes play an important or even dominant role in credit demand. Besides loan services, rural households show strong preferences for savings opportunities. Production credit is extended for the purpose of increasing the borrower’s production capacity and income. This function has been the center of attention in literature and research on financial market development. Consumption credit is an important component of financial needs of rural households. The integrated nature of production and consumption activities in rural households has been one of the fundamental reasons for developing the farming systems concept.