Paper

Policy Issues and the Enabling Environment for Rural Financial Access

Is there a case for interventions in rural finance markets?
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This presentation discusses the policy framework in rural finance and aims to develop an enabling environment for rural financial access. The presentation states that:

  • The role played by private finance will reflect the overall financial environment;
  • If the government's need in domestic financial markets is high, it leads to the "crowding out" of private credit.

The presentation examines the policy framework in the areas of:

  • Taxation;
  • Directed credit: quantitative controls;
  • Setting of interest rates' price controls;
  • Ownership of financial institutions by State banks.

It examines the case for interventions in rural finance markets and states that market interventions need to increase in efficiency and effectiveness according to clearly defined criteria. The presentation concludes by marking a path towards building an enabling environment in the areas of:

  • Financial infrastructure, stressing the need for:
    • Credit rating agencies to iron out information asymmetries;
    • Removal of banking secrecy laws;
    • Government information to increase information sharing.
  • Legal and institutional infrastructure, calling for:
    • Legislative provisions to expand outreach;
    • A stronger support to the laws on bankruptcy and creditors' rights;
    • Enhanced competition to expand outreach.
  • Technology and payments, in terms of:
    • Greater connectivity;
    • Identification and allocation of residual risks in the system.
  • Training services, such as:
    • Financial awareness programs;
    • Business incubator and mentoring models for small businesses;
    • Appropriate monitoring and evaluation.