Making Rural Finance Count for the Poor

This paper argues that the challenge in meeting the financial services needs of rural households lies not only in the lack of supply, but also in reducing risk and operating costs, so that financial intermediaries find rural clients more attractive. The paper:

• Identifies a gap in donor and government focus - the development and promotion of systems and instruments that reduce the risks inherent in rural finance;
• Identifies two kinds of risks: those that are primarily related to agriculture and "standard" risks associated with providing financial services to poor people;
• Explores ways to overcome the implementation challenges that have impeded the replication of viable rural financial models.

The paper recommends:

• Continued support for development of new products and systems that mitigate risk and increase availability of collateral;
• Particular attention to the role of the state and donors in promoting new systems;
• Government efforts to maintain a stable macro economy;
• The following specific areas of intervention:
  • Exploring the feasibility of financial products that combine input credit with weather-indexed insurance and produce marketing;
  • Promoting regulatory systems that engender confidence in the role of microfinance institutions (MFIs) and other non-bank financial institutions;
  • Promoting links between the informal, semi-formal and formal sub-sectors of rural financial markets;
  • Encouraging developing country governments to reorient their support towards creating an improved policy and enabling environment for rural finance.