WHO NEEDS RURAL FINANCE?
History of Rural Finance and Rural Finance Needs

• To bring awareness about past experiences in rural finance and what can we learn from it today
• To understand who needs rural finance and what are the constraints of rural finance

Historically, there were investments in rural and agriculture finance especially between 1950 and 1970 when governments wanted to stimulate the use of new agricultural technologies. During this period, many donor driven and government sponsored credit programs were designed.

These programs, with the best of intent, have failed due to implementation difficulties. The programs were mainly designed to serve large farmers, hence overlooking the needs of small holder farmers. Interest rates were subsidized and repayment discipline was lacking. Often, credit funds were diverted to non-financial rural needs. In addition, the programs did not succeed in financing technology expansion.

In mid 80's NGOs started to play an increasing part in rural finance recognizing the importance of local community participation and the central role that women played in rural households.

Microfinance has demonstrated that poor are credit worthy, therefore rural development practitioners saw microfinance as a potential form for serving the rural poor.

Microfinance showed that traditional collateral was not needed; it showed small loans make a difference, and can be profitable. It showed that institutions can focus on the poor and be sustainable. Microfinance programs taught, and continue to teach, people to work together for a common goal, to manage funds and to have confidence in themselves and their community efforts – to build both financial capital and social capital. Microfinance has raised the hopes to design the strategies and approaches to help the farmers and other poor in rural areas.

For additional resources in microfinance and microenterprise go to the Microfinance & Development Institute and the Microenterprise Development Certificate—South Africa.

As a result of past experience new paradigms in provision of rural finance have been established, as shown in this table.

Today's interventions include sound financial practices that minimize institutional risks and transaction costs as well as encourage information sharing among players. Financial institutions have a challenge to design demand driven products to serve the poor as well as to create and maintain long term sustainability. We invite you to read Rural Finance and Poverty Alleviation by International Food Policy Research.

It is important to acknowledge that clients have various needs, institutions that acknowledge the existence of various clients' needs are better able to design demand driven products and services.

Where is the gap? With the Value Chain illustration, linked here, let us examine demand and supply within rural finance. Value Chain can be defined as a range of activities needed to bring a final product to consumer, including design, marketing, and distribution. As you can see, there are many users/demanders of rural finance.

Remember, not all demanders are a part of the Value Chain. Non-agricultural businesses and off farm enterprises are not a part of an agricultural value chain. This makes financing difficult.

The constraints to RAF lead to a general under-supply of finance for agricultural activities. As a result of this reality, actors within the Value Chain resort to lending to each other in the chain, to make up for this under-supply. Therefore, not only do we need to pay attention to value chain we need to understand the financial chain if we are to bridge these gaps. Viewing the value chain through financial lenses can more easily identify the economic demand of different players.