Rural finance and micro finance development in transition countries in South-east and East Asia

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Micro-finance is an emerging important financial sub-sector in Asian transition countries. Its role is to improve financial access of the poor and small economic players and thus help them to build assets, thereby contributing to poverty alleviation. This paper, which was presented to the "Workshop on rural finance and credit infrastructure in China" in Paris in October, 2003, provides an overview of rural finance and micro-finance development in five countries of South-East and East Asia, viz. Cambodia, Lao PDR, Myanmar, Vietnam and Mongolia, and focuses on the institutional evolution and the inter-relation between policies and institutions.

The authors note the diversity of formal and semi-formal financial institutions — agricultural banks, micro-finance banks, micro-finance NGOs, financial co-operatives and other indigenous financial systems - that are present in these countries. It is particularly interesting to note the importance of the agricultural banks in almost all the countries reviewed and a major part of their operation is to serve small farmers and micro entrepreneurs, even though microfinance as a methodology has not necessarily been built into their systems. The paper also appraises the newer microfinance banks, particularly ACLEDA Bank in Cambodia and Xac Bank in Mongolia, and describes the characteristics that exemplify their rapid growth.

Following their review of rural and micro finance development in each country, the writers conclude that any monolithic view that expects a single type of micro-finance institution to dominate rural financial markets is incorrect. They believe that existing formal and semi-formal financial institutions should be reformed to overcome the constraints deriving from their old models of delivering financial products, and emerging, innovative NGOs need to progress a lot before they can be integrated into the formal financial sector. Their policy recommendations are:

  • Reform the agricultural banks because their extensive branch networks are an invaluable socio-economic infrastructure for rural finance but they do need managerial autonomy from the political system.
  • Adopt a market-based policy framework because this is a basic requirement for developing an efficient rural financial system. They site Cambodia as an example of appropriate policies leading to rapid expansion of services.
  • Develop the retail capacities of micro-finance institutions.
  • Improve the legal and regulatory framework for micro finance both in terms of removing restrictions and improving the regulatory capacities of the monetary authorities to understand the risk profiles of micro finance.
  • Improvement the governance of indigenous financial systems so that they have the potential to link with the formal sector in the future.
  • Increase savings mobilization and ensure that the deposits are properly safeguarded.

Document Information

Document Type Paper
Author Fukui, R.; Llanto, G.
Year of Publication 2003
Number of Pages 17 pp.
Region / Country Global, Asia, Eastern Asia, South-eastern Asia /
Primary Language English (en)
Keywords Financial Sector, Agricultural Microfinance, Agricultural Development Banks
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