Models of Rural Financial Institutions

This theme paper describes different models of rural finance institutions, and examines their comparative advantages, challenges and strategies for deepening rural financial systems.

• The first chapter describes the reasons for renewed interest in rural finance because of the decline in formal rural and agricultural credit supply;
• The second chapter is a discussion of the objectives of rural financial policy within the broader framework of development policy and goals;
• The third chapter compares the main characteristics of rural as opposed to urban environments. This highlights the specific constraints and issues of rural and agricultural finance. Characteristic differences between urban and rural areas are:
  • Higher transactions costs;
  • Higher risks, lower cash flows;
  • Complex legal frameworks;
  • Lower risk-bearing ability and higher vulnerability.
• Chapter four deals with an exhaustive description of different types of informal financial institutions and their strengths and weaknesses.

The paper describes that rural clients are of three types:

• Vulnerable households;
• Above the poverty line households;
• Larger agribusiness and other firms and owners of plantations.

One major recommendations of this paper is that there is no blueprint for rural finance. Institutional diversity is necessary to enhance competition, depth and breadth of outreach, and welfare impact.

The paper gives the following recommendation:

• Learning from past failures is important;
• There is no blueprint for rural finance;
• Rural public investment should have a decentralized financial system;
• Best practices of urban-based microfinance are relevant for rural and agricultural finance as well.