Rural Finance in Latin America and the Caribbean: Challenges and Opportunities
By Francisco Proenza, Mark D. Wenner (03/00, En)
The Importance of Financial Sector Development
Historically, financial sector development has been an important element in overall economic growth and development for three reasons. First, financial sector development helps to unleash the economic potential of increasingly greater proportions of the population and is highly correlated with accelerated economic growth. Countries with more developed financial markets and greater financial depth, as measured by the ratio of M2 to Gross Domestic Product, have grown faster than other countries with less complete and developed financial markets (King and Levine, 1993). Second, the lack of adequate financial services hinders the formation of new enterprises and the expansion and modernization of existing ones and contributes to income inequality. Those able to access credit and deposit services a priori are better able to increase their income than those that do not. Third, improving rural financial intermediation can contribute to alleviating poverty if accompanied by rational and equitable reforms in macroeconomic and sectoral economic policies and improvements in the functioning of factor markets.
Objectives
This paper has three purposes. First, it seeks to provide an overview of the current situation in rural financial markets in the region since the onset of widespread financial liberalization earlier in the decade (Section 2). Second, it presents a conceptual framework that explains why these markets do not work well and, in particular, why formal intermediaries find small-scale entrepreneurs to be unattractive clients (Section 3). Third, it identifies the main actions and policy reforms that are required to resolve the problems identified (Section 4).
This working paper is being published with the sole objective of contributing to the debate on a topic of importance to the region and to elicit comments and suggestions from interested parties. The paper has not gone through the Department?s peer review process or undergone consideration by the SDS Management Team. As such, it does not represent the official position of the Inter-American Development Bank. Please direct your comments to: [Mark Wenner at markw@iadb.org].
Last updated: 05/08/07
