Rural Finance in Latin America and the Caribbean: The Challenge of Getting Both Policies and Institutions Right
Despite considerable financial deregulation in larger financial systems, rural financial markets in Latin America and the Caribbean continue to remain peripheral and inefficient. This paper attempts to:
- Provide an overview of the current situation in rural financial markets;
- Identify principal factors that explain the poor functioning of these markets;
- Discuss the appropriate role for donors and government in developing institutional retail capacity.
The paper highlights the increasing trends in economy wide financial depths in the 1990s:
- The degree of monetization increased for a large number of countries in the region;
- However, this trend was not accompanied by an increase in formal credit services to rural areas.
The paper presents tables and analyses on formal financial services such as credit, deposit services, insurance and leasing. It notes that the access to these services has been generally low for the rural entrepreneurs and farmers.
It further observes the major symptomatic problems in the rural financial markets:
- Lack of access;
- Market segmentation and limited competition;
- Need for long-term finance;
- Paucity of operationally efficient and sustainable financial intermediaries.
After noting that the problems in the rural financial markets are caused by high level of unmitigated risks, imperfect information and high transaction costs, the paper recommends the following solutions towards creating a more inclusive rural financial intermediation:
- Creation of a conducive policy environment;
- Improvement in institutional retail capacities;
- Encouragement to the introduction and diffusion of other financial services, besides credit.
