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Financial Intermediaries and Economic Development – A Study of Transaction Costs of Borrowing for the Poor


  • Swamy, Vighneswara
  • B.K, Tulasimala


This study while validating the increasing role for financial intermediaries in economic development has attempted to highlight the importance of reduction of transaction costs for financial deepening and consequent economic growth. It is elucidated that higher transaction costs of borrowing for the poor in particular will retard the long-term growth of rural financial markets. Further, the empirical analysis based on the primary (survey) data has analysed and established that microfinance models of lending offer considerably lower costs of borrowing than those in regular models of direct lending by banks. The study opines that microfinance model of lending can provide cost-efficient model of financial intermediation for speedy financial development to further economic growth.

Suggested Citation

  • Swamy, Vighneswara & B.K, Tulasimala, 2011. "Financial Intermediaries and Economic Development – A Study of Transaction Costs of Borrowing for the Poor," MPRA Paper 47516, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:47516

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    References listed on IDEAS

    1. Dollar, David & Kraay, Aart, 2002. "Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
    2. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    3. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    4. Ravallion, Martin, 2001. "Growth, Inequality and Poverty: Looking Beyond Averages," World Development, Elsevier, vol. 29(11), pages 1803-1815, November.
    5. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    6. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
    7. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
    8. Gonzalez-Vega, Claudio & Schreiner, Mark & Meyer, Richard L. & Rodriguez-Meza, Jorge & Navajas, Sergio, 1996. "Bancosol: The Challenge Of Growth For Microfinance Organizations," Economics and Sociology Occasional Papers 28333, Ohio State University, Department of Agricultural, Environmental and Development Economics.
    9. World Bank, 2001. "World Development Report 2000/2001," World Bank Publications, The World Bank, number 11856, March.
    10. Levine, Ross, 1998. "The Legal Environment, Banks, and Long-Run Economic Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 596-613, August.
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    More about this item


    Transaction Costs; Banks; Microfinance; Nonprofit Institutions; NGOs; Economic Development; Financial Markets; Savings; Institutions and Growth;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth


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