Rural and Agricultural Finance

An estimated 500 million smallholder farming households (representing 2.5 billion people) rely to varying degrees on agricultural production for their livelihoods. They represent the largest client segment by livelihood of those living on less than $2 a day. 

Financial institutions seeking to work in rural areas face numerous constraints, such as poor infrastructure, dispersed demand, price and yield risks, and collateral limitations. Moreover, the main products of many microfinance institutions—short-term working capital loans with frequent expected repayments—may not be well-suited to longer-term agricultural activities, nor the resulting seasonality of the cash flow of rural households.

Not all rural finance is agricultural, and not all agricultural finance is rural. Rural finance refers to financial services used in rural areas by people of all income levels, and agricultural finance is the financing of agriculture-related activities, from production to market. Little is understood about the financial needs of individuals requiring rural and/or agricultural finance, other than the fact that demand far outweighs supply. Improvements in technology are making it increasingly viable for providers to sustainably and effectively reach people in rural areas, though a better understanding of potential customers and their financial needs will be necessary to make significant improvements.

Women harvesting flowers. Photo by Ha Tran Bao, 2013 CGAP Photo Contest.