Developmental Econ the Expansion of Essay

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For an individual who is accustomed to living in debt, or who is desperate, taking the quick payoff of a larger amount in the short-term may seem like a more attractive option. Because of borrower ignorance, the moneylender may offer a false incentive that rural individuals with little economic background cannot understand, like 'no interest' on the loan for the first few months. the, the interest rate will 'kick in' at a much higher rate.

There are other sociological and cultural factors at play as well, in terms of encouraging borrowers to make what seem like irrational decisions, as seen through the cold calculating view of an outside observer. The usurious moneylenders might have an important place in the community, and can help the borrower in other ways, either by influencing corrupt government bureaucrats or providing other forms of assistance and protection. The usurers might be members of a local, organized crime ring and the borrowers may be afraid to borrow from anyone else, because of fear for their survival.

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And the borrower, because he or she knows the moneylender personally, may trust the moneylender more than a faceless banker. This is not irrational, but reflective of a cultural ideal that favors personal and community relationships and ties over impersonal agreements, however advantageous those agreements might seem to an objective observer. In fact, the local moneylender might be a relative.

Ignorance, which is not the same as irrationality, is yet another problem that prevents effective decision-making in terms of selecting interest rates. Rural borrowers might not be aware of better interest rates from other sources in other areas or understand how much better the rate of interest may be from a development bank. Borrowing from a moneylender may have been what their parents did, and what they see other community members doing, and they assume it is normal and that there is no other option......

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