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Meeting Development Challenges: Renewed Approaches to Rural Finance

The key purpose of this rural finance approach paper is to provide practical guidance to World Bank staff that design and implement rural finance projects. It aims to assist staff to knowledgably choose appropriate design as well as to enable them to provide advice and guidance to their counterparts in partner countries. The primary target of the paper is task team leaders who are non-financial sector specialists working on rural development, irrigation and other programs and projects where access to finance is an issue.

This paper largely focuses around the financial institution level of rural finance sector development and aims to create awareness of the complexities of rural finance and its relevance for rural development, and to explain the principal methods and solutions that have been successful.

In doing so, the paper begins by providing an overview of the main issues restricting rural finance on the three levels of policy, enabling environment and institutional capacity. It also discusses the issues of appropriate subsidies and the use of grants versus credit. The meat of the paper then provides an analysis of the delivery channels and models for supporting rural finance, including special purpose institutions and products, and an overview of several cross-cutting issues. The preceding sections are illustrated throughout with useful case studies from a broad range of counties.

In the concluding section the paper pulls this discussion together and sets out a practical approach to the formulation of a country-specific rural finance strategy. The practical strategy formulation developed is broken down into the following sections:

information on the key elements of the policy context, enabling environment, and financial institutions are collected and analysed, along with information on the characteristics and structure of the real sector
findings from step one are then coupled with an analysis of the demand for financial services in the proposed project area
conclusion of the analysis with the identification and prioritisation of intervention options

This three-step focus is intended to provide a structure that will guide task-managers and help to ensure that all important elements in the project design process are considered.