The most common form of government intervention in the rural sector has been massive lending at subsidized interest rates. Credit programs generally aim to reach small farmers. However, despite the expansion of credit over the last three decades, few farmers in low income countries seem to have received or benefited from such credit. It has thus been common for small-scale farmers to resort to the formation of organized credit groups or cooperatives. This paper is a normative analysis of cooperatives viewed as institutions to improve the plight of small-scale farmers. The purpose is to analyze which structures are most successful, then to promote credit cooperatives and to design an optimal incentive scheme in place of subsidized credit policies of the past. The paper concludes by stating that a policy of providing assistance to existing and potential credit groups on how to set incentives, implement monitoring schemes and develop centralized resources is more desirable and more cost effective than the old fashioned and largely regressive subsidized credit policies.
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