Financial markets, credit constraints, and investment in rural Romania, Volumes 23-499 issue 499

Annotation This study evaluates the performance of financial markets in rural areas of Romania based on the 1998 rural household, rural enterprise, and financial intermediary surveys, along with other official statistical data for 1997. It presents empirical evidence indicating that constrained access to credit markets negatively influences the investment behavior of households and enterprises. The report recommends a detailed government strategy to correct the observed shortcomings of rural financial markets and identifies new challenges that are likely to appear Contents......Page 4 Foreword......Page 7 Abstract......Page 8 Acknowledgements......Page 9 Abbreviations and Acronyms......Page 10 A. Executive Summary......Page 11 B. Specific Objectives, Methodology, and Data......Page 32 C. Organization of the Study......Page 35 A. The Rural Economy within the Aggregate Economy......Page 36 B. Agricultural Sector Policies During the Transition......Page 38 C. Rural Employment......Page 39 D. Rural Households and their Economic Activities......Page 40 E. Rural Enterprises......Page 43 A. The Financial Sector......Page 48 B. The Banking Sub-Sector......Page 49 C. Mutual Rural Financial Intermediaries......Page 53 D. Distribution Network of Financial Services......Page 54 E. Market Shares in Rural Financial Markets......Page 58 F. Distribution of the Flow of Credit Among Borrowers and Lender Preferences......Page 60 G. Characteristics of Credit Products......Page 61 H. Participation of Rural Enterprises and Households in Financial Markets as Depositors and Savers......Page 67 A. Participation of Economic Agents in the Market for Loans......Page 70 B. Weak Supply of Credit......Page 71 C. The Demand for Loans: An Econometric Model......Page 83 A. The Extent of Credit Constraints in the Rural Sector......Page 90 B. Credit Constraints at the Level of Rural Households......Page 92 C. Credit Constraints at the Level of Rural Enterprises......Page 93 D. Investment Levels: Is It Where You Are and What You Have or What You Do With It?......Page 99 A. General Strategy and Emphasis......Page 113 B. Government Credit Lines......Page 114 C. Improving the Legal and Institutional Environment for Financial Transactions......Page 117 D. Improving the Legal and Institutional Environment for Using Land as Collateral......Page 119 E. Retail Lending......Page 121 F. Regulatory Concerns Regarding Chartered Non-Bank Mutual Financial Intermediaries......Page 123 H. Policy Coordination......Page 127 References......Page 130 List of Tables......Page 5 List of Figures......Page 6 The report assesses the performance of financial markets in rural areas of Romania, based on three - rural household, rural enterprise, and financial intermediary - surveys, carried out in 1998, and other official data covering 1997. The study finds that rural financial markets perform rather poorly in three key dimensions: the degree of access to financial services by rural economic agents (enterprises and households) is very limited; this limited access hinders the ability of these agents to take advantage of the investment opportunities available in rural areas; and, these markets failed to allocate flows of credit to those agents with the most profitable investment opportunities. This poor performance is caused by an unfortunate combination of short term circumstances, structural factors, and government policies, and interventions. In particular, the degree of access to credit services by rural agents is very low, because several factors have combined, to weaken both the supply of, and demand for rural credit. The report suggests a detailed government strategy to correct the observed shortcomings of rural financial markets, and identifies new challenges likely to appear. Moreover, the Government could assist in increasing the availability of credit, by improving policies in financial markets, legal and regulatory framework, and, the ability of the financial sector to provide retail financial services.