Deepening Rural Financial Markets: Macroeconomic, Policy and Political Dimensions

This paper examines the key features of the macroeconomic environment, policy framework, and government and donor interventions that are conducive to rural financial deepening. While favorable macroeconomic and sector politicize are necessary for expanding rural financial services, they are not a sufficient condition for achieving socially desired levels of rural financial deepening.

There is a growing interest in the promotion of rural financial deepening, that is, the expansion of financial transactions of all kinds in rural areas to reach broader clienteles, provide wider choice of services and to offer additional contract terms and conditions.  It finds that:

• New understanding of the role of finance in rural development regards efficient financial services as important in their own right in processes of resource allocation and risk management;
• New understanding of the role of the state in the promotion and regulation of financial markets questions the role of the state in price controls, administrative credit allocations and direct production of financial services;
• Successful rural financial deepening will, require closing three gaps in the provision of rural financial services: inefficiency, insufficiency and a lack of feasibility.

The article provides recommendations on actions and interventions required to close the inefficiency, insufficiency and feasibility gaps. It also highlights the need of specific state interventions to promote the demand and the supply of financial services.