Jan Pieter Krahnen

Development Finance as Institution Building: A New Approach to Poverty-Oriented Banking Jan Pieter Krahnen

The authors of this timely analysis compare the different ways in which financial services in developing countries are provided to poor target groups largely cut off from formal financial systems: small and micro-scale business, small farmers, and women. They argue that building sustainable and target group-oriented financial institutions is important and feasible, and that such building is likely to have greater development impact than the channeling of external funds to poor target groups. Yet the provision of financial services to the poor as well as institution-building efforts are likely to run into severe information and incentive problems. How these problems can be addressed and overcome is central to the authors' analysis. Drawing extensively on the conceptual tools of the new economics of information and institutions, Krahnen and Schmidt examine real-world cases of institution building. They consider formal and informal financial institutions, in particular group lend ing, rotating savings and credit associations (RoSCAs), and financial cooperatives, and demonstrate how information and institution economics can be put into prac tice. Development Finance as Institution Building has far-reaching implications for development policy and the design of aid programs. It is crucial reading for development specialists, policymakers, and scholars of development finance and international banking. This study has been prepared on behalf and with the support of the International Labour Office (ILO). It forms part of a program that explores the links between finance and poverty reduction.