TitleRural informal credit markets and the effectiveness of policy reform
Job NumberV9882/E
Number in series134
Series titleFAO Economic and Social Development Papers
Number of pages130
Price US$$11.00
In a large number of developing countries, particularly those in Sub Saharan Africa, informal loan markets constitute a significant part of the overall financial sector. Such markets are connected to the formal financial sector through the portfolio allocation decisions of households. The paper examines the role of rural informal loan markets in influencing the outcome of financial market liberalization policies often undertaken as part of stabilization and structural adjustment programmes. The paper proposes an analytical model which combines elements (assumptions) from both "structuralist" financial market theories and "financial repression" ones, on the basis of observed structural characteristics of economies in Sub Saharan Africa. To empirically assess the medium term effects of various policies, a computable general equilibrium model for Tanzania is used. The analytical and empirical results show the importance of informal financial sector in determining the macroeconomic and distributional outcomes of financial liberalization policies. Failure to consider the reaction of those markets, leads to policy outcomes drastically different than the alleged ones. The paper*s results point to the importance of assumptions about economic structure in accounting for the major differences among schools of thought concerning the effects of financial liberalization policies that constitute parts of stabilization and structural adjustment programmes.

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