| Formal financial institutions in El Salvador serve no more than 20% of small farmers in the country (those with 2.5 hectares of land or less and who represent over 65% of the rural population). In the absence of funding from these institutions, a significant number of small producers seek credit from non-conventional sources such as informal lenders. This study analyzes the relevance of informal credit for small farmers. This study was carried out in the municipalities of San Juan Opico in the department of La Libertad and Tecoluca, in the department of San Vicente. It is based on both data from various surveys that involved a total of 325 rural households and ethnographic research. Informal credit (either in cash or kind) is used by a significant number of households. In-kind credit provided by farm supply stores is used by nearly 60% of surveyed farmers. This credit (in the form of agricultural inputs) is used primarily for the production of basic grains. These loans amount to nearly 30% of production costs. The remaining 65% is supplied by the farmers themselves. The study found that farmers have some capacity to partly self-finance their productive activities, although this capacity varies according to their asset portfolio comprised of land, labor, small livestock, and social relations which are key in shaping the informal financial network. Store owners make good profits on loans granted, by charging relatively high interest rates. They are able to impose those rates because they monopolize the credit supply. In addition, small loans from relatives and friends are used by rural households as a coping strategy to deal with sudden shocks to income. All in all, the use of informal credit is part of the asset portfolio management and the safety net of rural households. Although farmers pay high interest rates on informal loans, they need them to finance their agricultural production which is the basis of their food security. |
