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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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File URL: http://arrow.hunter.cuny.edu/research/papers/HunterEconWP214.pdf
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Bibliographic Info

Paper provided by Hunter College: Department of Economics in its series Hunter College Department of Economics Working Papers 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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References

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Cited by:
  1. Jonathan Conning, 2005. "Monitoring by Peers or by Delegates? Joint Liability Loans and Moral Hazard," Hunter College Department of Economics Working Papers 407, Hunter College: 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.

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