The Economic, Legal and Regulatory Environment: Deepening Rural Financial Markets

Topic :

This paper notes that one of the explicit goals of recent development strategies in Latin America and the Caribbean has been to promote more competitive, efficient and stable rural financial markets with broader and deeper outreach. The main objective was to improve outreach and quality of services by reducing the cost of rural financial intermediation, and widening the range of financial services provided, above and beyond loan services.

This paper suggests that even though, all in all, the behaviour of suppliers and demanders is what determines the depth of rural financial markets, the ‘environment’ does create opportunities and impose restrictions that shape these behaviours. The ‘environment’ itself is understood to mean all the conditions external to demanders and suppliers, which affect the performance of rural financial markets. Some of these conditions are noted to be inherent to the natural environment or the results of human effort to modify the natural environment. Other conditions are inherent to the institutional environment created to facilitate transactions, to modify the results of market forces, or to promote certain activities, and to prevent instability, which could lead to opportunistic behaviour on the part of financial intermediaries and other market agents.

This paper examines the elements of the environment that typically effect rural populations’ capacity to save and to take on debt, transaction costs incurred by all who take part in rural financial markets, and the risks they face. Considered amongst the factors that determine transaction costs are market size and typical amounts transacted, distances, deficient information, and the weakness of the procedures in place to force compliance with intertemporal contracts.

This paper presents a comparative analysis of the rural financial markets of Costa Rica and El Salvador, based on studies by the Central American Academy and the Salvadoran Foundation for Economic and Social Development. Following this, the environments of Bolivia, Chile and Peru are examined, based on research conducted by the Peruvian Centre for Social Studies.

The paper concludes with a comparative analysis of Central and South American countries involved and lessons of general interest that were drawn from the analyses.

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