Financial Deeping and Efficiency of Rural Financial Intermediation

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Financial systems in transition countries are under ongoing reforms. Different kinds of institutions enter financial markets to serve new market segments. An important but risky and thus often neglected market segment is the rural (private farm) population. Especially in rural areas, the effect of different types of financial intermediation on the depth and efficiency of rural financial markets is not yet fully understood. At the same time, such peculiarities like dispersed clientele, high risk in combination with inadequate collateral and restricted refinance require new institutional approaches and banking strategies. Thus, the objective of the project is to analyse the two columns of financial system reform for the period 1990 to 2006, i.e. financial deepening and efficiency of financial intermediaries in rural areas. On the basis of macro-financial data at the national (and regional) level and data from lending activities of major rural financial intermediaries, the rural financial market depth will be quantitatively assessed. This allows for a better understanding of the past and present status of Bulgaria's rural financial market development. The second column of the project is the productivity and efficiency analysis of different organisational forms in financial intermediation. The methodologically ambitious shadow price approach will be applied to estimate best practice frontiers. Consecutively, comparison of allocative and technical efficiency will be conducted to determine potential supply of rural financial services. The empirical data will be collected at the national level in cooperation with the Bulgarian National Bank as well as at the micro level through surveying rural financial intermediaries in three selected regions in the case-country Bulgaria. The gained insights are expected to also help in understanding the developments in similarly structured financial systems of other transition countries.