Lessons Learned in Rural Finance: The Experience of the Inter-American Development Bank

This paper discusses the problems in rural finance markets in Latin America and the need for a conceptual framework, actions and policy reforms that are needed to develop the financial market.

The author discusses:

• The financial depth, efficiency indicators and access to formal financial services (credit and deposit services) in various countries in the continent;
• The lack of other services such as insurance and commodity-linked services;
• The need for a conceptual framework for analysis to unify the consideration of risk, imperfect information and high transaction costs, which he identifies as being the main causes of problems;
• The strengths and weaknesses of formal intermediaries (banks and finance companies), informal intermediaries (supplier-traders, money lenders, etc.) and semi-formal intermediaries (NGOs, credit unions, village banks and cooperatives).

He recommends the following actions to promote a competitive, efficient and stable rural financial market:

• An improved policy and institutional environment conducive for rural intermediation;
• Better intermediary retail capacity ways to improve operational efficiency in rural financial institutions and investment in new financial technologies;
• Introduction and diffusion of financial instruments other than credit.

The paper concludes with the argument that there is much to be done in improving rural financial intermediation in Latin America. There is a need to develop the legal, regulatory and information environment and to build stronger rural financial institutions.