Rural Finance Institutions and Systems
Theme Paper: “Models of Rural Financial Institutions”
by Manfred Zeller, Institute of Rural Development, University of
Göttingen
Abstract
Since the 1980s, governments and donors increasingly dismantled
support for rural and agricultural finance that followed the old
paradigm of subsidized and targeted credit, and increasingly invested
in micro-finance based on the new paradigm of building financially
sustainable institutions. Considerable learning and innovation has
taken place in the micro-finance industry over the past two decades,
resulting in best practice recommendations and an increasing number
of MFIs being financially sustainable while serving clients above
and below the poverty line. However, many MFIs serve urban clientele,
and if they operate in rural areas, their lending technologies tend
to favor the non-farm trade and handicraft sector. Few micro-finance
institutions provide seasonal and term loans for crop, agro-forestry
and livestock production and related processing and marketing of
agricultural produce. Against this background, the paper is motivated
by the question of what can we learn from the micro-finance revolution
so as to better serve rural areas and in particular the agricultural
sector.
The paper begins by briefly reviewing the dismal experience with
the old paradigm guiding agricultural finance. It then discusses
the specific socio-economic, agro-ecological and political economy
frame conditions for rural and agricultural finance, and the rural
demand patterns for financial services differentiated by poverty
level of clients. While these frame conditions and demand patterns
require adaptation and further institutional innovation, many lessons
learnt from urban-based microfinance are relevant for rural and
agricultural finance. Yet, some specific conditions of rural areas,
such as lower population density, lower level of transport and communication
infrastructure, covariant risks in production and consumption, seasonality
and lumpiness of agricultural cash flows, and lower human capital
require more than mere adaptation of models and best practices in
micro-finance. The paper presents different types of member-based
(cooperatives, solidarity groups, and village banks) and other micro-finance
institutions, and discusses their comparative advantages and disadvantages
in serving different rural clientele groups, such as smallholders,
the rural landless, commercial farmers and agribusiness firms. Brief
examples from several case studies of micro-finance institutions
serving rural clients illustrate existing solutions and related
constraints and potentials. The paper concludes with a number of
policy recommendations for a gradual approach in rural and agricultural
finance that builds on lessons learnt in micro-finance following
the new paradigm.
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