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INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UMI films the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand corner and continuing from left to right in equal sections with small overlaps. 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Ann Arbor, MI 48106 Loan Default and the Efficacy of the Screening Mechanism: The Case of the Development Bank in Guyana Dissertation Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University by Cyril Kenrick Hunte, M.S., M A. THE OHIO STATE UNIVERSITY 1993 Dissertation Committee: Approved by: Claudio Gonzalez-Vega, Ph.D. Richard L. Meyer, Ph.D. Cameron S. Thraen, Ph.D. Professor Claudio Gonzalez-Vega Adviser Department of Agricultural Economics and Rural Sociology Copyright by Cyril Kenrick Hunte 1993 Dedication In memory of my grandparents: Susan Smith and Berisford Hunte ACKNOWLEDGEMENT It is with a deep sense of gratitude and appreciation that I acknowledge the untiring efforts of Professor Claudio Gonzalez-Vega. As my principal adviser, Professor Gonzalez-Vega has been instrumental in helping me to understand the many issues in rural financial markets, using both theoretical models and practical experience, gained from his research assignments in many developing countries. His guidance over the last five years will long be remembered. My sincere thanks also to the other members of my committee, Professor Cameron S. Thraen and Professor Richard L. Meyer. Their incisive comments and timely suggestions made this research better than it would have been. I am deeply grateful for the financial support I received from three organizations which funded my graduate program. I acknowledge the financial support from the Rural Finance Program, Department of Agricultural Economics and Rural Sociology, The Ohio State University and the United States Agency for International Development (USAID). I also wish to acknowledge the scholarship provided by the World Bank/Government of Japan Scholarship Program, which allowed me to begin my graduate work in September, 1988. Without these generous sources, graduate school would have remained a desire. Gratitude is hereby expressed to Dr. Nelson Aguilera, who assisted me in the early stages of my research. Thanks are also extended to my other colleagues and iii friends in the Agricultural Economics program at the Ohio State University, especially Mr. Neal Blue, Mr. Saief Elhagmusa, and Ms.Susana Sanchez. Soon it will be your turn. My formal introduction to the problems in rural financial markets began when I attended one of the seminars that discussed some of the material included in Undermining Rural Development with Cheap Credit, edited by Adams, et al, 1984. This seminar was held in Guyana in 1980. In that same year, too, I was employed at the Guyana Cooperative Agricultural and Industrial Development Bank (GAIBANK), and subsequently, I attended a Rural Credit Course organized by the Economic Development Institute (E.D.I), The World Bank. Visits to development financial institutions in the Caribbean also formed part of my early enlightenment. I want to say thanks to the numerous borrowers whom I met over the years and a special thanks to the management and staff of GAIBANK, including my many friends, who recently assisted me with the collection of the data for this dissertation. To my many relatives, a special word of appreciation for their constant encouragement and support. I especially thank my parents, Janet and my late father, Cyril Berisford Hunte, who provided a focus, stability, a strong work ethic, and a discerning quality to separate the things that matter. To my wife, Jackie, I sincerely say thanks for being there at all times, no matter the circumstances. Her willingness to be involved, and her commitment to endure with me, made my journey that much easier. Finally, to the Grand Architect of the Universe, without whom nothing is accomplished, and nothing is achieved, I say a special word of thanks and praise. VITA December 13, 1951...............................................Bom: Georgetown, Guyana 1970-1975 .............................................................. Guyana Public Service: Clerk, Ministry of Agriculture, Forestry, Public Service Ministry 1979 .......................................................................B.Sc., Agricultural Economics Utah State University, Logan, Utah, U.S.A. 1 9 8 1 ....................................................................... M.Sc., Agricultural Economics Utah State University, Logan, Utah 1990 .......................................................................M.A., Economics The Ohio State University, Columbus, Ohio 1980-1984 ...............................................................Manager, Research and Development; Manager, Credit Department Guyana Cooperative Agricultural and Industrial Development Bank (GAIBANK) 1984-1988 .............................................................. Lecturer, Faculty of Agriculture University of Guyana 1984-1985 .............................................................. Deputy General Manager, GAIBANK. 1985 to present ...................................................... General Manager, GAIBANK. 1991 to present ...................................................... Graduate Research Associate Department of Agricultural Economics The Ohio State University v FIELDS OF STUDY Major Field: Agricultural Economics and Rural Sociology Financial Markets in Developing Countries. Studies in: Rural Financial Markets and Development Economics Claudio Gonzalez-Vega Douglas Graham Economic Theory and Banking. Stephen McCafferty Robert Driskill Patricia Reagan Edward Kane Applied Demand Analysis and Welfare Economics and Agricultural Policy. Wen Chem Alan Randall Luther Tweeten Quantitative Methods, Statistics and Econometrics. Mario Miranda Cameron Thraen Nelson Mark TABLE OF CONTENTS DEDICATION ...............................................................................................................ii ACKNOWLEDGEMENTS........................................................................................... iii VITA ..............................................................................................................................iv LIST OF TABLES..........................................................................................................x LIST OF FIGURES............................................................................................... xiii Chapter Page I. INTRODUCTION............................................................................................ 1 1.01 DEFAULT AT DEVELOPMENT BANKS .................................... 1 1.02 STATEMENT OF THE PROBLEM................................................. 2 1.03 HYPOTHESES .................................................................................. 7 1.04 ORGANIZATION ............................................................................ 9 II. REVIEW OF THE LITERATURE ON CREDIT RATIONING AND LOAN DEFAULT ...................................................... 10 2.01 CREDIT RATIONING....................................................................... 10 2.02 LOAN DEFAULT ............................................................................ 16 2.03 CONCLUDING REMARKS ............................................................ 19 III. THE FINANCIAL SECTOR IN GUYANA................................................... 22 3.01 INTRODUCTION............................................................................... 22 3.02 MACROECONOMIC ENVIRONMENT......................................... 23 3.03 STRUCTURAL ADJUSTMENT PROGRAM................................. 25 3.04 THE STRUCTURE OF FINANCIAL M ARKETS......................... 26 3.05 PERFORMANCE OF THE FINANCIAL SEC TO R...................... 33 3.06 POLICIES AND PERFORMANCE OF GAIBANK .................... 37 3.07 GAIBANK INTEREST RATE POLICY ........................................ 38 3.08 OBJECTIVES OF GAIBANK AND ELIGIBILITY ..................... 40

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