• Rural poverty and livelihoods

Rural poverty and livelihoods

Rural finance refers to financial services such as savings, lending, insurance and remittance services provided by a variety of actors. These actors can be friends, relatives, shopkeepers, traders, money lenders, traditional savings and lending groups, microfinance programmes or banks. Rural finance is a term used to cover those financial services provided in rural areas for agricultural as well as non-agricultural purposes.

Within the rural sector different groups and categories of individual require services designed to meet their particular needs. Poorer groups might need savings facilities and micro-credit to cover production costs and emergency expenses. Farmers and farmers’ organisations involved in cash-crop production will probably require larger amounts of credit to finance production, inputs, processing and marketing.

This practitioner’s guide covers different financial services, products and methodologies. It takes you through different types of financial service providers and discusses good practices.

Specific recommendations include:

• longer-term credit facilities are required for agricultural production as economic activities are characterised by longer business cycles than producers and traders. Plants and animals need time to mature before their products become available, and investment in machinery and buildings often take several years to produce returns
  
• insurance systems can be put in place to protect farmers who cannot repay debts due to animal sickness or spoilt harvests. Programmes are being developed but there is a problem in that disasters such as droughts, floods, and low prices often affect many clients at the same time
  
• member- and community- based organisations can reduce the cost of service delivery by handing management tasks to local members who are better able to offer low cost services in rural areas than other institutions. This approach is well adapted to the poorest but capital mobility is limited by members’ savings
  
• costs of accessing formal sector credit services are often high. Alternatives such as trader’s credit, contract farming and warehouse receipt schemes are required. Technological innovations such as electronic banking and mobile banking can contribute to cost reduction
  
• specialised organisations are generally better than NGOs when it comes to financial service provision. NGOs often do not have expertise or a business-like approach and are more effective at providing support services.
  

General conclusions of the guide are:

• the characteristics of the rural economy of a region or group will determine the choice of financial services and service institution. Decisions should be based on analysis of these characteristics and type of demand
  
• rural areas and marginal groups have not benefited equally from the growth in microfinance institutions. This requires development of new approaches to serve modern agriculture as well as marginal rural areas
  
• financial sustainability of a microfinance institution has often been achieved at the expense of social performance. Alternatives must be found to ensure that marginal groups and regions also have access to appropriate financial services to remedy this
  

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