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The issues of land clearance and intensification of agriculture cannot be seen as issues related exclusively, or in many cases even primarily, to loan-making decisions by formal banking institutions. While banks are the principal institutional source of capital, they are not always the most important source of credit for agriculture. In fact, in most of the developing world, in terms of aggregate lending volumes, banks generally lend far less to agriculture than does the informal sector.

Therefore, any program designed to confront the problem of the impact of agricultural lending upon the environment must have a broader perspective. The importance of informal capital markets points to the necessity of involving the broader society, and the government in its policy-making role, in the process of protecting the environment and building sustainable systems of agriculture.

To understand the role that banks play in financing agriculture, it is necessary to focus upon the broader capital market and upon the aggregate capital flows from all sources to the agricultural sector . There are three salient sets of features that characterize rural credit markets in the developing world.

First, banks, especially those in the developing countries, lend very little of their total resources outside urban areas and even less to agriculture. Their presence in the rural areas is more frequently in order to capture low cost deposits than to carry out an extensive lending program.

Second, in most developing countries, the informal market is a far more important source of capital than are formal banking institutions which supply a relatively small part of the total volume of credit flows to agriculture. Most production credit, as well as a fair share of term lending, comes not from formal banking institutions but, instead, from the informal market. In the Philippines, for example, "two-thirds of all Filipino farmers who borrow do so from informal lenders". ²⁵

25 V. Bruce J. Tolentino, Thirty-Three Facts About Philippine Agricultural Credit, Agricultural Credit Policy Council, Manila, 1987. In Sri Lanka, de Silva estimates that the formal banking sector provides only about 10% of the total requirements of credit for the rural sector; the remaining 90% comes from the non-formal financial market. fill a real need for credit in rural communities unmet by formal institutions.

In most countries, banks offer lower nominal lending rates to farmers than do informal lenders. However, the processing time, repeated travel from the borrower's home to the bank, the paperwork, literacy requirements, the demanding (and sometimes impossible) loan conditions as to equity, collateral, and credit histories, developed by bureaucrats in a distant urban area, as we]1 as the need to repay the loan in cash, add substantially to the cost of borrowing for small farmers. As a result, the effective borrowing rate, even in subsidized credit programs, is quite high. So high, in fact, that many farmers who could borrow at a formal banking institution opt for borrowing in the informal market.

We know relatively little of informal markets, except that in almost all developing countries, they appear to be the predominant source of credit for agriculture, meeting a demand that neither the banks nor the government is able to fill. After years of trying to suppress these lenders, variously called "usurers," "exploiters" or worse, they appear to thrive in the agricultural sectors of developing countries around the world and fill a real need for credit in rural communities unmet by formal institutions.

These sources of credit are difficult to identify and even more difficult to channel into socially desirable forms of lending. After decades of repression, these lenders would certainly view with suspicion any attempt at regulation.

Third, government seldom has adequate resources to meet more than a small portion of the total demand for credit. Total demand for agricultural production credit in the Philippines is estimated at about 60 billion Pesos. About 24 billion Pesos is supplied by the private banks (including commercial, thrift and rural banks). The government controlled only about one billion Pesos of agricultural production credit, or about 2 % of the demand.

In the forestry sector, the resource constraint imposed upon the public sector is even more marked. The Philippines has developed an innovative program called the Integrated Social Forestry Program (ISFP) which awards Certificates of Stewardship Contracts (CSC's) on denuded upland areas, and recently in mangrove areas. Llanto reports that in 1983, the program had 748 projects covering 320,000 ha. By 1989, there were 1,088 projects encompassing 450,000 ha., on which the government has issued CSC's covering 303,000 ha. ²⁶ The Philippines occupies about 298,000 square km. or nearly 30 million ha.; thus the ISFP program covered only about 1.5 % of the surface of the islands and had awarded stewardship certificates on about 1% of the land.