'Formal sources are necessary in the rural areas for the development of the rural infrastructure'. Explain it.
Answers
Answer: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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