Legal and Regulatory Requirements for Effective Rural Financial Markets

In this theme paper, the authors present reasons for the failure of many rural finance and rural development projects which are otherwise well-designed. They state that the projects fail because they call for non-legal, extra-legal and illegal behavior.

This paper sets out examples of such legal problems, discusses their consequences for rural finance, and offers the best practice remedies.

The paper recommends customizing laws to:

• Permit unsecured loan portfolios to serve as collateral for refinancing loans from the formal sector;
• Codify all economically important land use rights;
• Reform laws relating to borrowing status of the poor and facilitate them in legally conducting business with the formal sector;
• Allow farmers, their cooperatives and non-governmental organizations to participate in commercial transactions;
• Simplify and reduce the cost of bankruptcy procedures;
• Limit regulation of rural financial institutions to those taking deposits;
• Expand the use of collateral for loans;
• Expand the use of immovable property as collateral for loans;
• Reform commercial codes and introduce a minimal set of rules needed to run a modern business;
• Pass simple and effective laws governing intellectual property rights so that rural areas can fully participate in the biotechnology revaluation;
• Provide for a notice filing system for security interest property and for land-use rights in immovable property.