Micro-macro linkages in financial markets: the impact of financial liberalization on access to rural credit in four African countries

Almost every programme of economic reform contains a financial liberalization component; but little work has been done to assess the effects of financial liberalization on access to credit in individual markets. We present a model of this linkage, which predicts that conventional financial de-repression will have no significant effect on the price and availability of credit in the informal sector, but that financial innovation in the informal sector will affect such availability considerably. We test this proposition specifically against data for the period of financial reform in four African countries: Uganda, Kenya, Malawi and Lesotho. Such reforms had significant effects on interest rates, but except in Uganda these effects did not feed through into an increase in savings rates or in access to rural credit. Such access was, however, favourably influenced by institutional innovation on the supply side of the market for small-business and small-farm credit. Likewise, in two of the case-study countries-Malawi and Uganda-financial de-repression had insignificant effects on poverty and privatisation of the bottom end of the credit market on its own had disastrous effects, but expansion of the supply of smallholder credit had a highly positive poverty-reduction effect. Copyright © 1999 John Wiley & Sons, Ltd.