Dualism, technical change, and rural finance markets in developing countries

by Farrukh Iqbal

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This study investigates the anatomy of rural finance markets (RFMs) in a major developing country, India. The heart of the study consists of an empirical model of the determinants of moneylender interest rates which takes into account both the special features of Indian RFMs as revealed by a cursory overview of the distribution of rural loans by size, type, purpose, and source and some special features of the dataset used. The model allows tests of some important propositions linking RFMs to various aspects of rural economic development. The results show that interest rates charged by rural moneylenders are sensitive to a host of borrower-specific and locational characteristics that are affected by the process of economic development. It is concluded that the provision of technical change and investment opportunities may be less costly than direct subsidization as a way of bringing down rural interest rates in developing countries.

This report is part of the RAND Corporation note series. The note was a product of the RAND Corporation from 1979 to 1993 that reported other outputs of sponsored research for general distribution.

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