The Role of Financial Institutions in Economic — Development — a Theoretical Analysis
The endemic ‘fragmentation’ of financial markets in less-developed countries (LDCs) is by now a widely documented fact.1 The phenomenon owes its origin primarily to governmental policies which foster the development of certain ‘priority’ sectors in the economy through the liberal provision of highly subsidised bank credit to them. Since a large portion of the available supply of credit is absorbed by these sectors, only a limited volume remains available for allocation to the remaining sectors of the economy, which are perforce constrained to pay much higher rates of interest on whatever loans are provided to them. The resultant wide dispersion in interest rates charged on bank loans, simply on account of differences in the sectoral allocation of these loans, constitutes the essence of the phenomenon of financial fragmentation.
KeywordsFinancial Institution Industrial Sector Agricultural Sector Capital Good Bank Loan
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