Microfinance and rural financing

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This article summarises the results of a discussion held during the Luxembourg Round Table for Microfinance that took place in October, 2005. One core conclusion was that the challenge in financing the rural world is adapting to a variety of situations and looking at demand not only from the economic perspective, but also from a social and family viewpoint. The role of everyone in the main and secondary family activities and their seasonal character must be taken into account. Financial service providers that offer diversified products and different approaches for different market segments, with flexibility in guarantees and maturity dates are the most appreciated. Many MFIs are criticised by users because their loan terms are too short and too expensive.

Two tools were identified that could help to promote rural financial services: developing insurance systems to protect borrowers and guarantees to reduce lenders’ risks. With regard to sources of funds the workshop analysed the role of savings, remittances and external refinancing. The importance of refinancing to many MFIs was noted but their were concerns about high interest rates imposed by social investors who appear to forget their original mission, the high opportunity costs involved in formulating requests for refinance and the difficulty created when refinancers impose geographical or sectoral limits on loans.

In terms of the future, the roundtable noted that the State’s role as promoter, regulator and controller of financial services through legislation is absolutely necessary. However, it was felt that specific rules for the rural sector are needed in order to ensure equal access to financing. The absence of the State in the creation of a favourable framework for rural microfinance (lack of strong rural policies) was described as a very negative aspect. Innovations mentioned included the financial linkage system developed in Cameroon and the role of a farmer’s organisation in Senegal in the decision-making structure of the agricultural bank. Concerns were also expressed about the low profitability of agriculture and the problems caused to developing countries by the subsidised production in the north. It was suggested that Northern countries should put rural development of their Southern partners at the top of their agendas.

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