Effects of Low Interest Rates on the Poor in Low Income Countries

Over the past three decades, agricultural credit has received considerable attention in low income countries as governments have tried to stimulate output and help the rural poor through credit. Recent analyses, however, reveal major problems in many agricultural credit programmes. Cheap credit policies appear to fragment rural financial markets so that resources are not allocated efficiently. Low interest rates also undermine the financial integrity of financial intermediaries and force them to become highly dependent on loanable funds from central banks or external aid agencies. Despite the high hopes held for cheap credit as an effective way to help the rural poor, it tends to increase rather than decrease income concentration. In the discussion that follows, we briefly outline four ways that financial markets affect income distribution--through negative impacts on savers, leverage, negative real rates of interest, and defaults. We conclude with suggested policy changes that might reduce the adverse impact financial markets have on income distributions.