The Role of Financial Institutions

This note begins by setting out that financial institutions are in the business of lending money and providing financial services. They can provide a range of credit services, including short- and long-term loans for business and personal use. This range allows them to serve rural, agricultural and agribusiness clients. Financial intermediaries can mobilise deposits – deposit and transfer services need to be available to allow low-income, rural, poor people to maintain liquid, monetary savings. It is noted that agricultural enterprise development, or rural development more broadly, will be well served by a financial sector that provides a wide range of services to the agricultural sector in rural areas.

It is also highlighted that at the same time, however, a number of constraints limit the provision of services by financial institutions to the agricultural sector and rural areas. These include:

  • Higher transaction costs
  • Seasonality of agriculture
  • Loan collateral issues
  • Asymmetry of information
  • Legacy of failed state-subsidised directed credit programmes for agriculture
  • Covariant risk

This note reviews the risks and problems financial institutions face in trying to provide rural and agricultural financial services, highlights new approaches and mechanisms to mitigate credit risk and improve the profitability of rural lending. This issue also discusses the potential for historically urban-focussed microfinance institutions to provide services in rural areas, including to farmer areas.

  • Resource type
  • Author Miller, M
  • Organisation
  • Year of Publication2005
  • Region
  • LanguageEnglish
  • Number of pages6 pp.
  • EditionRAFI notes

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