Issue Brief on Rural Finance

This paper explores the problems that exist in rural financial markets. The author states that the reasons behind the failure of these markets are well documented. The paper notes three gaps that hinder the development of better functioning rural financial markets: evaluation gaps, technology gaps, and political economy gaps. The reasons for failures of rural financial markets are listed as:

• Low effective demand due to high incidence of poverty;
• Low rates of return for most rural productive activities;
• Severe asymmetric information problems;
• High transaction costs due to poor communications infrastructure and spatial dispersion of clients;
• High levels of unmitigated risk;
• Inadequate regulatory frameworks;
• Inappropriate service delivery technologies.