Promoting Efficient Rural Financial Intermediation

Abstract

Although governments have traditionally used subsidized credit programs to promote agricultural growth, this approach has generally failed to improve incomes and alleviate poverty in rural areas. It has also led to the mistaken belief that rural credit programs cannot be profitable. A new approach seeks to raise standards of living in rural areas by casting the government in a very different role- one of setting a favorable legal and policy environment for rural financial markets and addressing specific market failures cost effectively through well-designed and self-sustaining interventions. There is evidence that this approach can be highly successful. The village bank system of bank Rakyat Indonesia has shown that financial services can be extended to millions of low-income rural clients without relying on subsidies. Indeed, the program has generated enormous profits for the bank by using simple, innovative, and largely replicable techniques.