Financial Sector Liberalisation: Should the Poor Applaud?

Abstract

Summary Increasingly micro‐finance is being encouraged to reformulate its primary focus from explicit antipoverty work to concentrate instead on financial sustainability. Much of this approach is predicated on neoclassical theory which calls for liberalisation of financial markets. It is asserted that, apart from prudential supervision, liberalised markets would create an enabling environment for better financial servicing of the poor; and it is time that micro‐finance programmes became financially self‐sustaining, and therefore free of subsidies. Empirical testing of these views remains inconclusive, indicating the underlying fact that in many cases financial markets, even after liberalisation, have not behaved entirely as modelled. Though pro‐poor interventions in financial markets often have been unsuccessful, they were motivated by valid concerns about the poor being under‐served. The main contention of this article is that the current wisdom overestimates what liberalisation can achieve for greater market competition in serving the poor. This is because of its exaggerated faith in the role of interest rates in market clearance, and its inadequate account of informal financial service providers. Stronger, rather than reduced, focus on the poor and poorest, even if via subsidised micro‐finance programmes, would help develop financial markets. As in other areas of economic reform, selfish motives of the market may require a helping hand to sustain poor‐friendly innovations in service provision.