Developing Rural Financial Markets

In many developing countries, rural financial markets cannot operate efficiently due to factors such as: unstable macroeconomic environment, excessive government intervention, and legal and regulatory barriers.

This paper contrasts two different approaches employed to support rural financial markets:

• Standard approach which boosted agricultural production, but did not lead to sustainable income growth or poverty reduction;
• New approach that favors a more indirect role for governments, emphasizes savings over credit, and avoids subsidized interest rates.

The paper concludes that cost-effective approaches to rural financial services have been remarkably improved in the past twenty years, but policy, legal and regulatory reforms need to be implemented in order to allow rural financial markets to develop and flourish.