Rural Finance: Recent Advances and Emerging Lessons, Debates and Opportunities

Rural finance remains very challenging and in developing countries it is generally weak, despite the efforts of donors, governments and private investors to improve it. However, important lessons are emerging from these experiences that provide useful guidelines on how to expand and make more effective the provision of rural financial services.

This report examines these lessons about rural finance. It identifies the recent advances, current debates, major gaps, challenges and opportunities that confront efforts to expand and strengthen it. This review, conducted between June and November 2004, it is based on the latest literature available and on discussions with various donors, practitioners and researchers active in this field.

Throughout this review, the term ‘rural finance’ refers to the provision of financial services to a heterogeneous rural farm and non-farm population at all income levels. It includes a variety of formal, informal and semiformal institutional arrangements and diverse types of products and services including loans, deposits, insurance and remittances. Rural finance includes both agricultural finance and rural microfinance, and is a sub-sector of the larger financial sector.

The authors utilize a conceptual framework based on the new rural financial paradigm that considers rural populations as bankable through effective institutions. Twelve key issues in rural finance are analyzed and discussed within this framework:

Advances in Institutions

  • Reforming state-owned development banks
  • Member-owned institutions: SACCOs and credit unions; self-help groups
  • Expansion of microfinance institutions (MFIs) into rural areas
  • Informal finance provided through buyers and input dealers via value chains
  • Apex institutions

Advances in products

  • Savings: flexible savings products for smoothing incomes and asset creation
  • Term loan products: housing loans and leasing

Advances in services

  • Methods of risk reduction: crop, livestock, and health insurance for client protection; credit guarantee schemes for expanding outreach and institutional protection
  • Remittance and transfer services

Advances in processes

  • Technological advances to reduce transaction costs and improve information

Outreach and Sustainability

  • Reaching in a sustainable manner both economically active, very poor populations and remote areas with appropriate institutions, products, services, and technology

Enabling environment

  • Advances in regulation, supervision, and legal reforms

This report discusses these 12 issues in detail in order to identify recent advances, emerging lessons and remaining gaps in knowledge. Finally, the report provides general suggestions for donors in subjects such as knowledge generation and dissemination, operations and advocacy, emphasizing that more rigorous longer-term studies are necessary, in order to advance knowledge and develop new ideas for extending the financial frontier.

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