Theory of Financial Dualism

Professor Hala Myint has developed the theory of financial dualism. Such dualism rises because of division of money markets in unorganized and organized money markets in LDCs.

1. FINANCIAL
DUALISM
Sr. Sindhu P.J (Sr.Sharin CTC)

2. ProfessorHalaMyinthasdeveloped
thetheoryoffinancialdualisminhis
work”EconomicTheoryandUDCs
publishedin1971.
Suchdualismrisesbecauseofdivisionof
moneymarketsasunorganizedand
organizedinLDCs.
Therateofinterestinunorganizedmarket
ishigherthantherateofinterestin
organizedmoneymarketwhichis
concernedwithmodernsector.

4. •Theunorganizedmoneymarketconsists
ofvillagemoneylenders,landlords,traders
etc.,.Theychargethehighinterestbecause
ofthefollowingreasons.
•(i)Thelendershavemonopolyand
positionoftheborrowersisveryweak.
•(ii)Thereisashortageofsavingsinthe
traditionalsectorbecausemostofthe
savingsaremadeintermsoflandorgold.
•(iii)Duetonaturalcalamitiesetc.therisk
attachedwithsuchlendingareveryhigh.

5. •Theorganisedmoneymarketofthe
UDCsconsistsofcommercialbanksand
otherfinancialinstitutions.Theygiveshort
termloanstomodernmanufacturing
industries,foreignownedexportindustries
andtogivethegovt.
•IntheorganizedmarketsofLDCsthe
interestratesarelowandcreditfacilities
areabundant.Theloansareadvancedto
manufacturedsector,exportindustryand
moderncommercesector.

6. Consequences oftheco-existenceof
unorganisedandorganisedMoneymarket
•1.Sincethereisgreatdemandforloansinthe
modernindustrialsector,alldomesticsavings
flowtothatsector.Thiscreatesshortageof
capitalinthetraditionalsector.
•Thegovt.expenditureonpublicserviceslike
transportandcommunication,supplyof
electricityetc.,favourstheurbansectoras
againsttheruralsector
•Theultimateresultisthemisallocationof
resourcesbetweenthemodernand
traditionalsector.

7. •AccordingtoMyintthecheapandeasy
credittothetraditionalsectorisnotprovided
becauseoffollowing:
•(i) The high over head costs and salaries of
officials of commercial banks in the rural
areas.
•(ii) The red-tapism in dealing with small
borrowers according to the rigid rules.
•(iii) The lack of coordination between the
head office and the branches.
•(iv) Lack of subsidized loans supplied by the
agricultural banks etc.

8. Professor Myint suggesttwo types of policies
to reduce financial dualism in LDCs:
•(i)Theofficialinterestrateintheorganized
capitalmarketmustbeincreased.Thiswill
attractthesavingsbothfromwithinthe
countryandfromabroad.Itwillalsocreate
anequilibriumbetweenthedemandfor
fundsandsupplyoffunds.
•(ii)Thereshouldbefreeaccessonequal
termstocapitalfundsbymodernand
traditionalsector.Thiswillreduce
misallocationofresourcesbetweenthetwo
sectors.

9. THANK YOU