Finance and Development
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Finance and Development Surveys of Theory, Evidence and Policy

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.
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Chapter 10: Rural Financial Markets

Susan Johnson


10. Rural financial markets Susan Johnson 1. INTRODUCTION The term ‘rural financial market’ was adopted in the early 1980s to reflect the changing analysis of the context of rural credit (Von Pischke et al., 1983). The term refers to ‘relationships between buyers and sellers of financial assets who are active in rural economies’ (p. 4) and to the financial intermediation process involved in the transferring of financial claims using both formal and informal organizations. It was the outcome of the convergence of financial repression thinking with an improved understanding of informal financial markets and the financial intermediation needs of rural households. Financial sector reform policies have been in operation since the 1980s and a considerable body of work has developed in theorizing and investigating their consequences. The thinking on rural financial markets supported the analysis of reform for rural credit policy. Nevertheless, the analysis of the operation and consequences of reform has still mainly focused on the formal financial sector. While the majority of economic actors in low-income countries do not directly or significantly participate in the formal financial sector, the financial arrangements in which they do participate are generally regarded as irrelevant to the operation of formal financial sector reform since the scale of individual transactions is small. Despite this, reform policy has considerably influenced the way in which interventions to provide financial services for poor people are designed and implemented. Donor interest in the provision of financial services through the development of self-sustaining microfinance...

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