Financial Innovation and Rural Development
Ahorro, No. 198, 1986
Posted: 28 Feb 2006
Financial intermediation is a diffused process that involves a large number of actors at different levels. Each of them in any economic environment has the opportunity to meet the challenge of innovation. In most developing countries agriculture remains a principal source of income for the majority of population, but in most of rural areas of these countries financial intermediation has a poor performance and is unable to promote development. Financial innovation, therefore, may be the way to break the vicious circle of poverty and can play a crucial role in socio-economic change in the peasant society. The paper considers some of the fundamental issues concerning financial intermediation and financial innovation in rural areas of LDCs. It consists of two main parts. The first part provides a critical overview of rural financial markets in LDCs and discusses the most relevant weaknesses of these markets, due mainly to their fragmented nature and to distortions brought in by government concessionary credit policies. Furthermore cheap-credit policies for agriculture have hampered in many instances the development of viable institutions in the formal financial sector. The second part of the paper concentrates on proposals directed to redress this state of affairs. It explores and evaluate suitable financial innovations, both institutional and operational, to be implemented in this context. Crucial reforms are needed to build more complete rural financial institutions devoted both to deposit taking and lending or, if it is the case, to transform existing single-function institutions to multi-function institutions. More appropriate financial techniques should be designed and implemented to cater for the specific needs of a rural environment.
Keywords: financial innovation, rural developoment, savings mobilization
JEL Classification: G 28, O 16, Q14
Suggested Citation: Suggested Citation