6 requirements, bank lending based on household deposits implies a "(l-a) 100 percent intermediation" where "a" is the reserve deposit ratio.) Given this difference, so the argument goes, financial liberalization **may** reduce the overall degree of financial intermediation of the economy, provided bank deposits are better substitutes for UMM claims than for cash. Van Wijnbergen (1982) and Edwards (1988) have provided empirical support for this hypothesis (now popularly known as the "financial crowding-out hypothesis"), using data from South Korea (henceforth, Korea).

The analytical value of this hypothesis for developing countries **as a** whole is yet to be established, however. The evidence of other authors (Little et al., 1987; Ghate, 1988; Fernando, 1988), in fact, suggests that any generalizations based on the Korean experience may be misleading. In Korea, "the UMM is largely an urban phenomenon" (van Wijnbergen 1982:124) and is "intertwined closely with the banking system, as funds raised by dealers in that market often pass through the banking system" (Kim 1986:151). It is therefore not unrealistic to treat UMM claims and commercial bank deposits as close substitutes. In other developing countries (except perhaps in Taiwan (Koshaka, 1984)), there is no such thing as "the informal credit market." Rather, there are many informal credit markets (distinguished by such factors as geographic location, type of lerder, and industry or service being financed) which operate independently of each other and with no links to the banking system. A significant portion of iaiformal lending takes the form of noninterestbearing loans made on the basis of kinship, friendship, or patron/client relationships. And, given the high risk involved in the informal markets, most interest-bearing loans are made at rates that may be 5 to 10 times higher than market rates. Moreover, surveys suggest that resorting to the informal markets for investment and working capital is not typical of entrepreneurs in most countries, however common it may be in Korea (Little et al., 1987). It therefore seems reasonable to conclude that financial market reform is not likely to trigger a significant shift of funds from the informal to the formal market.

Another objection to the crowding out argument is that it assumes that a choicc is made by borrowers on the basis of monetary assets (cash, bank deposits, informal market claims) alone. Thus, the possibility of substitution of physical assets for financial assets, strongly emphasized by certain investigators (McKinnon, 1973: Galbis, 1977) is ignored. Given the nature of household asset holding behavior in develoning countries, this substitution process may be of crucial importance in determining the outcome of financial market reform.

An increase in the volume of OMM transactions, even if it involves considerable crowding out of UTMI activities. may be desirable on efficiency grounds. That is, a given quantitv nf savings mobilized via the formal financial sector may be more productive than the same quantity of savings mobilized through informal channels. Eeeause the supply of credit in curb markets is limited. money lenders itn these mart ts operate on a small scale and charge high interest rates. Cuonequentlv. borrowers use these funds mostly for short-term projects and for a':tiviti-s where the potential