RURAL FINANCIAL MARKETS AND DEVELOPMENT IN LOW INCOME COUNTRIES; SOME INSIGHTS FOR THE US?

rural financial markets (RFM), recent criticism has been aimed at developing country RFM"s patterned after U.S. models. This paper explains why developing country RFM"s have excluded small rural borrowers and identifies similar trends now appearing in U.S. RFM"s. After noting the importance of RFM"s in facilitating heterogeneous transactions at minimal cost, the author points out that developing country RFM"s, despite heavy assistance from foreign donors, are financially weak. This problem stems, in his view, not from deficiencies inherent in the RFM"s, but from development policies and political manipulation combined with inflation. The sanctioning of low interest rates requires RFM"s, in times of inflation, to absorb negative returns, thus eroding their assets and forcing them to ration their services through non-market means, i.e., selecting only borrowers who have excellent collateral, are previous customers with good repayment records, and can provide a cosigner; and excluding poor borrowers by requiring bribes, delaying loan applications, and charging costs normally assumed by the lender, e.g., loan application fees. In addition, inequitable government policies are often imposed on rural entrepreneurs, e.g., overvalued exchange rates and price ceilings which depress RFM growth and create an unfavorable savings and investment environment. RFM"s are also subject to manipulation by the politically powerful, especially when funds are sought from the central bank or the government during times of economic depression. By contrast, the vigor of the U.S. agricultural sector since the late 1930"s has kept U.S. RFM"s strong. Recent slowdowns in farm productivity, however, and the use of grain embargoes as foreign policy weapons, together with inflation and the regulation of some rural interest rates, also threaten this market. The author concludes by suggesting that, since financial instruments are liquid and naturally flow to areas of the greatest return regardless of political fiats, policymakers should focus on improving rather than on controlling the RFM process.