Financial sector liberalisation - Should the poor applaud?

Increasingly micro-finance is being encouraged to reformulate its primary f ocus from explicit antipoverty work to concentrate instead on financial sus tainability. Much of this approach is predicated on neoclassical theory whi ch calls for liberalisation of financial markets. It is asserted that, apar t from prudential supervision, liberalised markets would create an enabling environment for better financial servicing of the poor; and ii is time tha t micro-finance programmes became financially self-sustaining, and therefor e free of subsidies. Empirical testing of these views remains inconclusive, indicating the under lying fact that in many cases financial markets, even after liberalisation, have not behaved entirely as modelled. Though pro-poor interventions in fi nancial markets often have been unsuccessful, they were motivated by valid concerns about the poor being under-served. The main contention of this art icle is that the current wisdom overestimates what liberalisation can achie ve for greater market competition in serving the poor. This is because of i ts 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 help ing hand to sustain poor-friendly innovations in service provision.