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Finance and Development

Surveys of Theory, Evidence and Policy

Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde

In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.
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Chapter 9: Finance for the Poor: The Way Forward?

Thankom Arun, David Hulme and Imran Matin


Thankom Arun, David Hulme, Imran Matin and Stuart Rutherford1 1. INTRODUCTION Since the 1980s, microfinancial services have generated considerable interest among academics, donors and development practitioners as an alternative to the documented failures of government rural credit assistance to reach lowincome households (Hulme and Mosley, 1996; Johnson and Rogaly, 1997). The failures are attributed to causes such as urban biased credit allocation, higher transaction costs, interest rate restrictions, high default rates and corrupt practices. The reasons for poor loan recovery are related to inappropriate design features, leading to incentive problems, and politicization that made borrowers view credit as political largesse (Lipton et al., 1997). These failures stimulated a set of innovative financial institutions in several corners of the world which began to prosper and attract attention, especially in Bolivia, Bangladesh and Indonesia. These microfinance institutions (MFIs) share a commitment to serving clients that have been excluded from the formal banking sector. The development of the microfinance sector is based on the assumption that the poor possess the capacity to implement income-generating economic activities but are limited by lack of access to and inadequate provision of savings, credit and insurance facilities. This approach also breaks from the directed credit strategies by reducing the government involvement and by paying close attention to the incentives that drive efficient performance (Morduch, 1999). The developments in microfinancial services have been based on a prototype delivery model that is considered the best answer to capture financial needs of the poor in...

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