31 Credit from suppliers are quite popular even though the difference in prices for cash terms and credit terms may be substantial, implying a high rate of interest. While farmers can get production loans from institutional sources to cover the cost of inputs, microenterprises have to depend on market channels. Most of them purchase their raw material on credit for up to a month. Interest rates show a wide variation, from 2 percent to 15 percent per month, and are implicit in the excess prices charged on credit-based purchases. According to a survey conducted by Development Research and Management Services for the World Bank Project on Microenterprises, the difference in prices can frequently be between 10 percent and 15 percent.

Buyers sometime make advance payments to producers to help them purchase raw materials. Although this payment is disguised as an advance, there is an implicit interest rate, which can be as high as 15 percent a month. This arrangement is reversed in case of the parchi system. The parchi is basically an IOU given by a buyer who does not wish to make a cash payment. Instead, the buyer issues a parchi at a higher price. The parchi indicates the quantity, price, date of payment, and aggregate amount. Parchis can be discounted in the market. The implicit rates are between 2 and 7 percent per month. The period of maturity varies between twenty and sixty days. Confidence in the viability of the borrower is critical, because there is no legal recourse.

Land Based Credit Arrangements. Land-based credit is the informal instrument used by tenants and subsistence farmers. It is widely used in Sindh, Baluchistan, and Southern Punjab. The credit is extended by the landlord for purchase of inputs and for consumption. No collateral is required, but conventionally the credit constitutes the first charge on the produce. According to the 1973 rural credit survey interest rates for this type of credit were about 60 percent higher than institutional rates. About 11 percent of informal finance comes from this source. With the decline of feudal influence, its importance may diminish over time.

Money Lenders. Since independence, professional moneylenders have not been a significant part of the credit system in the rural areas. According to a survey of five Asian countries credit comes from moneylenders averages only 6 percent of rural credit. In Pakistan the proportion is even smaller. The rate of interest varies from 2 to 4 percent per month, and interest has to be paid monthly. Moneylending is considered an unworthy profession and its importance is declining.

Informal credit generally has a low transaction cost and a short transaction time. There are no proceduml rigors the lag between agreement and disbursement of credit is minimal, no collateral is required, and documentation is minimal. At the same time, there are no standard terms and conditions, and there is great variation in interest rates and maturity periods. Interest rates are usually twice institutional rates. Interest rates can be usurious where competition from the formal market is weak. Due to growing availability of formal credit, the rates of interest for informal credit are believed to be declining, although firm data are not available. Where commodity transactions are involved, interest charges are generally not explicit but are embedded in prices.