Rural Finance in Latin America and the Caribbean: Challenges and Opportunities
The paper sees that, despite substantial financial deregulation in larger financial systems, rural financial markets in Latin America are shallow, segmented, and inefficient. Reviews current situation and the causes of the problems observed in rural finance in Latin America and the Caribbean. Presents a conceptual framework that explains why these markets do not work well and why formal intermediaries find small-scale entrepreneurs unattractive clients. It highlights areas that show promising solutions to those problems and identifies the main actions and policy reforms that are required to resolve the problems identified. It says that the principal reasons for the observed market failure are:
- Pervasive risks;
- Information asymmetries;
- High transaction costs present in rural financial markets.
It suggests that in order to improve the situation, yet avoid government failure, there should be policy reform, institutional capacity building and new product development. Discusses the role of donors and national governments and says their role is primarily to create a conducive environment and the role of the private intermediaries is to assume risks and to provide financial services. Concludes that:
- Financial market and economic policy liberalization that occurred in the late 1980s and early 1990s in Latin America and the Caribbean were necessary but not sufficient conditions for the deepening and improved functioning of rural financial markets.
