Making Rural Financial Institutions Sustainable

The provision of financial services in rural communities is a very challenging task, especially in developing countries. This guide has been developed as part of a project assisting the development and replication of financial service cooperatives in rural areas of South Africa. It is a “how to” manual on designing and establishing a framework of best practice rules that will help to ensure sound, sustainable operations in a rural financial institution (RFI).

The guide first stresses the need for a regulatory framework which enables RFIs to operate within a constructive set of rules, with independent oversight. The writers observe that a regulatory framework can be structured in many ways and still be effective. The important factor is to involve all the key stakeholders in the formulation of the rules to ensure that they are acceptable and likely to work.

The guide then sets about defining supportive rules and standards that encompass best practices of banking and will help RFIs to be sustainable. Following the discussion of each rule are questions to consider and illustrations of generic operating rules. The issues covered include:

  • business purpose and scope of business
  • ownership, customers and members
  • profit distribution
  • governance – Board of Directors and conflicts of interest
  • capital adequacy
  • safekeeping of deposits
  • credit policies and procedures, and managing the loan portfolio
  • asset/liability management
  • interest rates on deposits and loans
  • accounting standards, reporting and auditing issues
  • compliance with other laws

The guide also provides a useful list of reports for monitoring compliance and advice on the use of enforcement or corrective methods when unsafe, unsound and illegal banking activities are identified. Another topic covered is that of RFIs forming relationships with one another and also developing affiliations with commercial banks, funding sources or community interest groups. The guide closes with a ‘sustainability checklist’, which can be used by those interested to assess the completeness and adequacy of their particular RFI rules and standards.

This interesting guide provides a comprehensive introduction to the most important rules and standards that any organization involved in providing financial services to small farmers, village entrepreneurs, pensioners and others should follow. It is useful resource for government officials working in the Ministry of Agriculture or Finance and staff of a central bank. It is also invaluable for people who are working to establish new financial services in rural communities or who are concerned with overcoming known weaknesses in a group of existing RFIs, as well as advisers in technical assistance programmes aimed at improving the well being of the rural poor.

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