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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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  • Jonathan Conning & Michael Kevane, 2003. "Why isn't there more Financial Intermediation in Developing Countries?," Economics Working Paper Archive at Hunter College 214, Hunter College Department of Economics.
  • Handle: RePEc:htr:hcecon:214
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    Cited by:

    1. 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.
    2. 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.
    3. Shannon Mudd, 2013. "Bank Structure, Relationship Lending and Small Firm Access to Finance: A Cross-Country Investigation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(2), pages 149-174, October.
    4. Stefan Dercon (QEH), Tessa Bold, Cesar Calvo, "undated". "Insurance for the Poor?," QEH Working Papers qehwps125, Queen Elizabeth House, University of Oxford.
    5. Nagarajan, Geetha & Meyer, Richard L., 2005. "Rural Finance: Recent Advances and Emerging Lessons, Debates, and Opportunities," Working Papers 28317, Ohio State University, Department of Agricultural, Environmental and Development Economics.
    6. 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.
    7. Kenneth Majau Mugambi & A. van der Merwe, 2017. "Historical Incidences of Credit Rationing among Micro and Small Enterprises in Kenya," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 229-236.

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    Keywords

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