Finance and Development

Finance and Development

Surveys of Theory, Evidence and Policy

Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde

In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.

Chapter 8: Finance and Poor People’s Livelihoods

Susan Johnson, David Hulme and Orlanda Ruthven

Subjects: development studies, development economics, economics and finance, development economics, financial economics and regulation


Susan Johnson, David Hulme and Orlanda Ruthven 1. INTRODUCTION Views about the way in which financial services should be provided for poor people are changing. The dominant approach has, until recently, been production-based and suggested that poor people lack the financial capital that will enable them to invest and engage in productive activity, in particular making use of their labour. This view reflects, at the household level, the macroeconomic analysis that identified capital constraints to growth as a key cause of slow development. In line with this analysis, efforts to provide credit for poor people from the 1950s to the 1990s focused on the direct provision of credit, usually subsidized, through government agricultural credit schemes and NGO initiatives. Such credit was in the main aimed at the agricultural sector, often in the context of the introduction of new agricultural technologies. This approach started to take root in the informal enterprise sector in the mid-1970s. At this time, research started to demonstrate the importance of the informal sector as a source of employment and potential economic growth (ILO, 1972) and development interventions started to focus on directing credit to it. The performance of these credit programmes was generally found to be poor, both in agriculture and enterprise, state or NGO-based (Adams et al., 1983; Adams and von Pischke, 1992). In the 1980s, an approach which used group-based lending and regular repayment brought new hope. However regular repayment was invariably a problem for more rural and agriculturally based households, leading...

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