| This study integrates the cost of borrowing in rural less developed countries (LDCs) with investment decisions at the farm level. Its major objective is to examine the signifiance of borrower loan transaction cost in farm level decisions to borrow and invest. The study examines borrowing behavior of those farmers using formal rural credit in LDCs.;Moreover, the theoretical framework is utilized to formulate the model and derive the functions for loan demand and the per unit loan transaction cost. Besides, the rate of interest, since a farmer of a given size of farm also incurs transactions costs (e.g., entertainment for the cosigner(s) and/or loan agent(s)), the demand for formal credit is taken as a function of farm size, the rate of interest that is legally imposed, and the transactions price (cost) that the rural firm incurs to secure and repay the credit. The per unit loan transaction cost, on the other hand, is dependent on the amount of loan the farmer wants to obtain and the size of his farm. In many LDCs farm size is the major collateral to the rural loan.;Both loan demand and the borrower loan transaction cost functions are empirically tested and analyzed. The hypothesis that, more of the formal rural credit in LDCs flow to large farmers than to the smaller farmers, is tested and analyzed. Also, the hypothesis that, for a given loan size the smaller farmers incur more per unit loan transaction cost than do the large farmers, is also formally tested. The results generally seem to support these hypotheses. Inavailability of sufficient data on borrower loan transaction cost has been the major problem in this study.;An investment framework is used to introduce borrower loan transaction cost as user cost of capital in investment decision. The legally restricted rate of interest in real terms is assumed to be not significantly different from zero in these rural sectors. This assumption was based on the various studies in these nations that the rates of inflation have cronically been much higher than the legal rates of interest. Using the per unit loan transaction cost as a proxy for marginal cost of borrowing, farmer's demand for rural credit is derived. |
