The paper suggests that the role of monetary and financial institutions is fundamental for economic development. The introduction of money and credit reduces the costs of exchange and transactions and extends the market for goods and services and the scope of the division of labor. Completing transactions in goods and services through the intermediation of money, as opposed to barter, is yet another demonstration of a non-Euclidean world where the most direct line between two points is not necessarily the shortest or least expensive option.
The paper also emphasizes the non-homogeneity of borrowers on the basis of risk. The focus in this case is on extending the reach of financial markets by rendering the potential borrowers equivalent through the provision of collateral or security.
The paper concludes that the lending to small farmers in particular becomes extremely risky and costly under conditions that are only too familiar in underdevelopment and poverty:
* Absence of transport links and of support infrastructures like irrigation in many rural areas;
* Unfavorable terms of trade for the agricultural sector;
* Uneven access to land or modern agricultural inputs.
Remedying these deficiencies improves the overall economic viability of small borrowers which in the final analysis determines the reach of the formal and the effectiveness of both formal and informal financial intermediation.
