Abstract: What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a free market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.
Keywords: microfinance, credit cooperatives, rural transformation, land inequality, Prussia
JEL classification: G210, N230, O160, Q150
Lay summary: Establishing a financial institution can be a boon for a population, but it is difficult to do so without a significant initial investment. It is far easier to develop a sort of ‘credit union’, whereby local shareholders can establish a cooperative to provide small-scale loans and saving services. This paper explores the development of these sort of microfinance institutions in rural Prussia in the late nineteenth century, offering a useful insight into how financial institutions develop, and their impact on local economies and businesses once they are established. This model has potential from a developmental perspective, showing the value of microfinance to a developing economy.
Cite this article: Marvin Suesse, Nikolaus Wolf, ’Rural Transformation, Inequality, and the Origins of Microfinance’, Journal of Development Economics, Volume 143, 2020, 102429 https://doi.org/10.1016/j.jdeveco.2022.102952
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