Rural Finance Today: Advances and Challenges

Rural finance is referred to here as the provision of financial services through formal, semiformal and informal institutions to rural farm and nonfarm population at all income levels. The authors of this paper state that in the past, many rural finance programs failed due to a combination of lack of attention to institution building, faulty design and implementation, and bad macro policies driven by political interests.

It is noted that currently, however, promising developments may potentially push the rural finance frontier forward. The major breakthrough for current forms of rural development stem from the new rural finance paradigm of the late 1980s, which is premised on the fact that rural people are bankable, and rural clientele are not limited only to farmers and they demand varied type of financial services for which they are willing to pay. This paper highlights several advances that are being made in today’s rural finance sector, and identifies a number of remaining challenges.

The paper is divided into four key sections. The first section covers advances in institutions, which begins by highlighting that government agricultural development banks still dominate in several countries and some have been successfully reformed. It also discusses the fact that several microfinance institutions are increasing their rural operations and are becoming important suppliers or rural financial services, and that member-based informal institutions such as SHGs and SACCOs are increasing and have the potential to play an important role, especially in remote rural areas.

The second key section highlights advances in products and services. It begins with flexible savings products that are being developed to service rural areas. It also discusses how rural leasing, under certain conditions, provides a viable financial option for rural clients. Index-based insurance, the importance of remittance services to rural areas and the emergence of products that comply with Islamic laws are also covered.

Advances in processes are the topics of the third key section. The four main areas discussed here are: how a better understanding of financing through value chains is developing; how partnerships between commercial banks and informal systems are expanding rural outreach to new clients; how strategic alliances among various types of institutions are growing as a way to offer new financial products in rural areas; and, how the use of electronic technology is revolutionising the provision of rural financial services, especially in countries where the IT sector is less regulated than the financial sector.

Finally, before concluding, the paper lays out three key challenges – the possible reintroduction of interest rate ceilings; reducing the costs and risks of e-banking in rural areas; and, developing an enabling policy environment.

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