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Why isn't there more Financial Intermediation in Developing Countries?

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Abstract

This paper proposes to organize thinking about the opportunities for improving and extending financial markets and safety nets for the poor, by focusing on factors that may explain why the linkage of local financial networks and safety nets with the larger economy often fails or is incomplete. Understanding the nature of these impediments is the first step in proposing policies to help promote more effective linkage and intermediation. We propose four explanations for the slowness of adoption of intermediation (high costs of delegated monitoring aggravated by limited intermediary capital; lock-in and crowding out effects from local insurance arrangements, social norms against cooperation with intermediaries; and political resistance to new institutions that shift the balance of power in local polities). Of course, financial repression and weak legal systems remains important as cause of lack of intermediation. We conclude with a review of public policy for more effective intermediation.

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Bibliographic Info

Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 214.

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Length: 50 pages
Date of creation: 25 Jun 2003
Date of revision:
Handle: RePEc:htr:hcecon:214

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Keywords: financial intermediation; mutual insurance; safety nets; microfinance; microcredit;

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Citations

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Cited by:
  1. Stefan Dercon & Tessa Bold, 2007. "Insurance for the Poor?," Economics Series Working Papers GPRG-WPS-073, University of Oxford, Department of Economics.
  2. Marcoul, Philippe & Veyssiere, Luc, 2008. "Impact of Supermarket Procurement System on Farmers' Credit Access," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 43862, European Association of Agricultural Economists.
  3. Shannon Mudd, 2013. "Bank Structure, Relationship Lending and Small Firm Access to Finance: A Cross-Country Investigation," Journal of Financial Services Research, Springer, vol. 44(2), pages 149-174, October.
  4. Dercon, Stefan & De Weerdt, Joachim & Bold, Tessa & Pankhurst, Alula, 2006. "Group-based funeral insurance in Ethiopia and Tanzania," World Development, Elsevier, vol. 34(4), pages 685-703, April.
  5. Jonathan Conning, 2005. "Monitoring by Peers or by Delegates? Joint Liability Loans and Moral Hazard," Economics Working Paper Archive at Hunter College 407, Hunter College Department of Economics.

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