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Rural Finance in Latin America and the Caribbean: Challenges and Opportunities

This paper begins by stating that rural financial markets do not function properly for several reasons, some of which (such as imperfect information) affect all financial transactions. Others are specific to the sector and can be explained by the structure of rural economies, their high level of risk, and the presence of urban biases in economic policy. The paper suggests that understanding how these factors interact turns out to be essential in identifying the most adequate practices and formulating policy recommendations.

This paper begins with an overview of the current situation in rural financial markets in the region since the onset of widespread financial liberalisation earlier in the decade. In doing so it considers the depth of rural financial markets, efficiency indicators, access to formal financial services and a limited range of other financial services (such as commodity-linked insurance and financing).

The paper then moves on to present a conceptual framework that explains why these markets do not function well and, in particular, why formal intermediaries find that small-scale business is an unattractive clientele. Within this section the paper looks at the causes of shallowness, segmentation and inefficiency and following this, the consequences of the problems identified.

The final section aims to define the main actions and policy reforms that are required to resolve the problems identified. Firstly, the need to create a favourable policy environment is highlighted (such as macroeconomic stability and policy consistency, appropriate sectoral economic policies, clear definitions of land use and ownership rights, an effective legal environment, and adequate regulatory environment and the development of enhanced information environments). The second recommendation is the need to develop financial institutional retail capacity and lastly, the paper suggests the promotion of other financial services and innovation.

The paper concludes with the view that the lack of positive outcomes in rural financial intermediation in Latin America and the Caribbean to date is due largely to incomplete and insufficient policy and institutional reforms. It notes that overall macroeconomic and financial market policies have improved in the last decade, but much work needs to be done to improve the legal, regulatory and information environments and to build stronger rural finance retail institutions. The laissez-faire notion of “getting prices right” as sufficient for positive change, the paper ends, must be replaced by the notion of “getting institutions and technologies right” once basic financial and economic liberalisation has occurred.