Rural Finance Outreach and Sustainability
Theme Paper: “The Evolution of Institutional Issues in Rural
Finance Outreach, Risk Management and Sustainability”
By J.D. Von Pischke, President, Frontier Finance
Abstract
Purpose and objective. The New Rural Finance is dedicated
to creating more efficient rural financial markets. A test of these
markets’ effectiveness is provision of financial services
that give poor rural families an incentive to deal with transitory
food security in order to avoid chronic food security. The New Rural
Finance emphasizes commercial sustainability as essential for institution
building as the means of achieving efficiency and sustainability.
Innovation is essential. Financial markets innovate in
three ways: 1) reducing transaction costs, 2) lengthening term structures,
and 3) refining valuation processes. Focusing intervention in rural
financial markets on these three possibilities helps to ensure that
objectives are realistic and that results are measurable.
Loose cannons. The previous donor-driven episode of rural
credit in the 1970s and 1980s collapsed under its own weight. It
is useful to review how this episode gained popularity and why it
ultimately failed on most fronts, as there was no official post
mortem. A decade is a generation in donor agencies, so it is doubtful
that the lessons of previous generations have percolated down. Further,
donors’ incentives have not changed. Donor failure is perhaps
the largest challenge to getting it right this time. Experience
with microfinance since the late 1980s provides a basis for identifying
best practices that could lead to the productive structuring of
rural finance. Failure is socially useful when it is explored and
rendered transparent.
Focus on institutional performance. Rather than using
institutional type as the major focus or first screen in the process
of selecting financial intermediaries that will receive donor funds
to implement the rural finance revival, it would be more effective
to design rules of engagement oriented toward effective institution
building. Any institution meeting criteria specified in this paper
(as a basis for launching discussion) could receive donor support.
An interesting example is provided by efforts in microfinance to
use donor funds to encourage commercial banks to “downscale”
to serve the small end of the market.
Supplier and buyer credit is extremely important in agriculture
generally. Until its contours are understood, the potential for
wasteful application of donor funds through financial institutions
is material. When its contours are understood new possibilities
are likely to arise.
Fair play. Finally, assuming open markets, efforts should
be made to reduce agricultural subsidies in OECD countries because
they hurt producers in poor countries. This thrust should be included
in USAID’s agenda for improving conditions in rural areas
in poor countries.
|
Get
full text