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Fragmentation and Embeddedness: An Alternative Approach to the Analysis of Rural Financial Markets

  • Economics


Political economy approaches to analysing the efficiency of rural financial markets have focused on the role of power and social relations. Neo-classical institutional economics, on the other hand, has used information and transaction costs to explain performance. Recognizing the limitations of both approaches, this paper presents an alternative that focuses on the institutional form of financial intermediaries, that is, the governance structure of rules, monitoring and enforcement mechanisms that enable them to operate. This structure is supported by both formal and informal rules, norms and sanctions. As a result, the ways in which transaction costs are affected by governance structures can be identified and the embeddedness of financial intermediaries in social relations can be theorized. The application of this approach in Central Kenya demonstrates the insights that it offers into explaining borrower preferences in the financial market.

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