Rural Financial Markets in Developing Countries

This paper attempts to provide a framework within which the evolution of financial intermediation in rural economies can be understood.

The paper briefly discusses the prominent features of rural financial markets such as:

• Fragmented or absent markets;
• Government interventions.

The paper discusses the models of rural financial markets like:

• Complete market benchmark;
• Empirical tests of efficient risk sharing;
• Consequences of imperfect financial markets;
• Contracting under asymmetric information and imperfect enforcement;
• Moral hazard;
• Multi-period and repeated contracts, limited commitment, and reputation;
• Limited liability, collateral and its substitutes;
• Property rights and credit supply.

The paper focuses on the role of rural financial intermediaries like:

• Crowding-in versus crowding-out of financial services;
• Group loans, cooperatives, ROSCAs, and mutuals;
• Policies.

The paper concludes that:

• From a wide variety of rural settings, it is evident that financial markets are highly fragmented and imperfect;
• The main causes of imperfections afflicting rural financial markets are the difficulties that arise in transactions of contingent promises when information is asymmetric and enforcement of contracts is not assured;
• There is a manifest need for careful state attention to institutions that support rural financial intermediation;
• New research to focus on rural financial markets must be the issues that surround the development of these intuitions of property rights, legal enforcement of financial contracts, and information diffusion.