Making rural finance count for the poor

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This working paper defines rural finance as encompassing all savings, lending, financing and risk minimizing opportunities (formal and informal) and related norms and institutions in rural areas. In addition, this paper identifies a significant gap in donor and government focus – the development and promotion of systems and instruments that reduce the risks inherent in much rural finance. Risks are primarily related to agriculture and arise from agricultural prices, weather and political factors, as well as the more ‘standard’ risks associated with providing financial services to poor people (such as those arising from information asymmetry and a lack of client financial service histories).

The paper also explores ways to overcome the implementation challenges that have impeded the replication of viable rural financial models. Particular attention should be paid to the role of the state and donors in promoting new systems, while governments need to maintain a stable macroeconomy, an essential factor for the development of efficient financial markets. Specific areas of attention include:

  • exploring the feasibility of financial products that combine input credit with weathe rindexed insurance and produce marketing using warehouse receipt systems
  • promoting regulatory systems that engender confidence in the role of MFIs and other non-bank financial institutions in rural savings mobilization and as channels for rural payments and transfer of remittances;
  • promoting links between the informal, semi-formal and formal sub-sectors of rural financial markets; and
  • encouraging developing country governments to reorient their support towards creating an improved policy and enabling environment for rural finance and away from more direct interventions and subsidies.

This paper examines the issues that need to be considered and/or addressed in pursuing policies to make rural finance more readily available and beneficial to the poor in developing countries. Improving rural finance systems will help to raise household incomes and reduce poverty, and will contribute to the first Millennium Development Goal (MDG) on the eradication of extreme poverty.

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