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Microfinance Institutions Moving into Rural Finance for Agriculture

Topic :

The majority of microfinance institutions (MFIs) have, until now, tended to rarely extend their services to marginal rural areas dependent on agriculture, due to higher transaction costs, price and yield risks, seasonality and collateral limitations associated with the agricultural sector. This Agriculture Investment Note produced by the World Bank details how a few innovative MFIs, including Bolivia’s PRODEM and Caja los Andes, and El Salvador’s Calpiá, have been successful in expanding to provide financial services to poor rural households. Through the adoption of a financial systems approach, which has recognised that financing for agriculture requires not only an emphasis on credit, but also a wide range of financial services, including savings, short and long term finance, insurance, money transfers for remittances and leasing.

Due to the diversity of activities, and sources of income and financing within rural households, successful MFIs have been required to:

  • implement flexible methodologies and products to serve the diverse, often seasonal needs of their clients, such as offering flexibility on the timing, amount disbursed and repayment schedules which match agricultural production cycles,
  • apply prudent risk management techniques to ensure strong financial sustainability and stable portfolios,
  • use new technologies to increase operational efficiency and lower transaction costs, while improving access to financial services for their rural clients.

The benefits of increased MFI activity in rural areas and in financing agriculture are also described. For instance, it can lead to increased competition, higher volumes of finance, and a wider range of financial services becoming available to farmers and their households. Moreover, the rapid growth of the agriculture portfolio of some MFIs suggests that there is significant unmet demand from rural households for agricultural finance.

The Note also emphasises the urgent need for the public sector to play a role in creating a suitable enabling market and policy environment for rural finance to continue to grow. It concludes by setting out the principle lessons that have been learnt in supporting MFIs that move into agricultural finance and recommendations for practitioners involved.

  • Resource type
  • Author Pearce, D.; Goodland, A.; Mulder, A.; Brar, A.
  • Organisation
  • Year of Publication2004
  • Region
  • LanguageEnglish
  • Number of pages5 pp.
  • EditionAgriculture Investment Sourcebook

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