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Rural Banking: Designing an Effective Legal Framework for Microfinance | Author: Ian Davis

Rural Banking: Designing an Effective Legal Framework for Microfinance | Author: Ian Davis

Approximately 1.2 billion people live in extreme poverty, surviving on less than $1 per day. In emerging markets, commercial banks generally serve only ten to twenty percent of the population, excluding eighty to ninety percent of the population from the formal financial sector. Many in this “un-banked” population could benefit from access to financial services. In most developing countries, rural financial markets are based partially on a foundation of law and partially on a non-legal foundation of extra-legal (and sometimes illegal) activities. These legal and non-legal foundations directly influence the operation of rural financial institutions. This comment will discuss the intersection between rural finance and legal systems. The focus of the paper will be on an emerging legal issue in developing countries: integration of microfinance institutions with the formal legal framework. The comment argues that the benefits of microfinance regulation outweigh the costs and is divided into four sections: The first section is an introduction to microfinance; the second section provides an overview of the issue of microfinance regulation; the third section offers suggestions for specific aspects of a favorable legal framework for microfinance; the final section analyzes an example of an effective microfinance regulation law.

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