formal sources are necessary in rural areas for the development of rural infrastructure.
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The Importance of the Informal Financial Market
for Rural Development Financing in Developing
Countries: The Example of Pakistan
WINFRIED MANIG
The informal credit market is of crucial importance in the rural areas in Pakistan,
even after decades of considerable development of formal credit organisations and of
subsidised credit programmes by the government. This is due mainly to the fact that
informal credit relations are embedded in the economic, political, and social interaction
networks of the inhabitants in the rural areas. These interaction networks also maintain
the direct credit costs and the transaction costs at a low level. However, the national
development policy underestimates or even negates the significance of the informal
financial market. Here, political action is required for initiating change.
INTRODUCTION
The lack of capital and the absence of attractive investment opportunities are
considered to be important reasons behind inadequate economic development in
many developing countries. This is why an attempt is made in most developing
countries to encourage, through development policy measures, capital formation as
well as the supply of financial means in the form of credit through official financial
institutions. The hypothesis of a financial bottleneck thus has led to the establishment
of credit systems predominated by the government to finance the necessary
investments in urban and rural areas of most developing countries.
In Pakistan as well, specific government credit programmes have been
implemented through the establishment of a formal system of credit organisations in
the rural areas. In addition to the supply of mostly subsidised credits, it was
necessary to establish a system of financial organisations in central places to
guarantee their physical accessibility. Thereby, the expansion of the formal credit
system itself was considered to be a component of the development process [von
Pischke et al. (1983); Mittendorf (1987), pp. 6 ff.]. Does the expansion of the formal
credit system actually satisfy the needs of potential customers? This question will be
discussed by taking Pakistan as an example.
Winfried Manig is Professor at the Institute of Rural Development, University of Göttingen,
Germany.
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Answer:
Rural development is a comprehensive term which essentially focuses on
action for the development of areas that are lagging behind in the overall
development of the village economy.
Farmers need money to buy additional land, implements and tools,
fertilizers and seeds, paying off old debt, personal expenses like
marriage, death, religious ceremonies, etc.
Since the gestation period between crop sowing and realisation of
income after sale of agricultural produce is very long, farmers need
to take credit.
Multi Agency Approach made Rural Banking consist of:
(a) Co-operative Credit Societies
(b) Commercial Banks
(c) Regional Rural Banks.
Rural development can be done by agricultural development through:
(a) SHGs and Micro Credit Programmes
(i) Self-Help Groups (henceforth SHGs) have emerged to fill
the gap in the formal credit system because the formal credit
delivery mechanism has not only proven inadequate but has
also not been fully integrated into the overall rural social and
community development.
(ii) Since some kind of collateral is required, vast proportion of
poor rural households were automatically out of the credit
network. The SHGs promote thrift in small proportions by a
minimum contribution from each member.
(iii) From the pooled money, credit is given to the needy members
to be repayable in small instalments at reasonable interest rates.
(iv) By March end 2003, more than seven lakh SHGs had reportedly
been credit linked. Such credit provisions are generally referred
to as micro-credit programmes.
(v) SHGs have helped in the empowerment of women.
(b) State Bank of India and Other commercial banks
(c) Regional Rural Banks (RRBs) and Land Development Banks
(d) National Bank for Agricultural and Rural Development
(NABARD): NABARD is an apex institution entrusted with all
matters concerning policy, planning and operations in the field of
rural credit and related economic activities. Its main functions are
as these:
(i) To serve as an apex funding agency forthe institutions providing
credit in rural areas.
(ii) To take appropriate measures to improve the credit delivery
system. The bank was to focus on restructuring of credit
institutions and training of personnel.
(iii) To coordinate the rural financing activities of all credit
institutions and maintain liaison with Government of India,
State Government, Reserve Bank, and other national level
institutions concerned with policy formulation.
(iv) To undertake monitoring and evaluation of projectsrefinanced
by it.
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