March 2004
http://www.basis.wisc.edu/rfc/documents/Synthesis%20Paper.pdf
Abstract
This paper synthesizes the ideas presented during the conference Paving the Way Forward for Rural Finance held in June 2003. The conference was aimed at rethinking rural finance and reengaging donors and practitioners in the development of rural finance. It emphasizes the dependency of the rural environment on agriculture, according to which it proposes indirect policies, products and strategies that address the liquidity risks and savings constraints that prevail in rural areas.
Key policies and programs from conference participants are:
Insurance products and loan guarantees would encourage financial institutions to increase their exposure to the agriculture sector.
Information infrastructure such as credit bureaus or credit scoring technology would increase efficiency in the provision of credit in rural areas.
Savings products are of special need in rural areas, where most people save in illiquid assets. In order to provide them efficiently, institutions must be strengthen and a legal framework that protects depositors is needed.
Legal constraints to provide ad-hoc financial products should be removed and there should be more flexibility in the accepted collateral for credit
Credit from suppliers, wholesalers, etc should be transformed so that small rural producers can benefit from better credit terms and efficiency. Encouraging the creation of producer associations, the linkages of markets with financial institutions or the use of warehouse receipt lending.
Summary
The paper focuses on the specific risks associated to the agriculture sector, due to the high dependency of rural areas on this sector and highlights the need to develop enabling policies that would induce the entry, assure sustainability and facilitate inter-linkages among financial institutions.
The authors suggest the use of indirect approaches, as opposed to subsidies or government provided projects as in the 1980s. The indirect participation of the state and donors should aim to create an enabling environment for the financial sector and strengthen institutional capacity to encourage competition.
The proposed policies are presented under 5 areas:
Correlated risk and sectoral uncertainty, which can be mitigated by developing insurance products linked to natural disasters or by having donors’ guaranteeing loans in the rural sector. These policies would encourage participation of private participants, increasing market knowledge of the sector.
Information access and management is needed both at the institutions’ level as well as infrastructure. Donors could sponsor from information management systems to make MFIs more efficient to the development of an independent credit bureau that allows different institutions to share credit-related information.
Product diversification should be increased especially to break the saving’s constraint by strengthening institutions and protecting depositors. Innovative products that meet the liquidity constrains and income streams of rural people should be encouraged by a legal framework that protects savers and encourages innovation. Another area where product development could be enhanced is remittances.
Legal environment that facilitates secured lending and that is flexible regarding the assets that can be used as collateral. This will give access to a larger group of people, while still protect the interest of lenders..
Value-chain financing, which usually lacks of transparency and efficiency should be transformed so that small rural producers can benefit from better credit terms and efficiency. This kind of credit could be enhanced by the development of producer associations, by linking markets with financial institutions or by promoting the use of warehouse receipt lending.
These strategies should allow for more effective rural microfinance, which should contribute to poverty alleviation by relaxing the financial constraints of risks and liquidity. The authors suggest that the ultimate impact of efficient financial markets in rural areas would contribute to agriculture growth and greater financial sector depth, but it should take a very significant effort from all involved parties.