Relatively high interest rates slows borrowing, stagnates business and creates hardships on individual borrowers. Economic policies in the industrial countries determine interest rates worldwide.
High real interest rates are adding significantly to structural budget deficits in both developed and developing countries.
In the agricultural regions which form the major part of developing countries, agricultural credit to farmers is supplied mainly by local money-lenders and traders. Exorbitant rates of interest, amounting to barely disguised usury, are charged. In addition, the lender is usually in a position to apply, or to threaten, a wide variety of sanctions which, although usually intangible, may maintain the borrower in a situation bordering on servitude, since it may be very difficult for him to pay off his accumulated debts. The lender is often also the local commodities broker-speculator.
The organized money-market, even if developed in agricultural regions, would tend to find that loans by verbal agreement, without security, and dependent on ability to repay based on income constantly subject to climatic hazards and price fluctuations, involve an unacceptably high risk. The unorganized money-market has the advantage of making cash readily available under conditions which official institutions would not accept.