Abstract
We identify three types of obstacles (missing institutions) that limit the process of financial deepening in rural financial markets. Each of these obstacles contributes to a continuing and common dilemma in developing countries - the lack of long-term finance. In Africa, as in most developing regions, there is need to develop a more consistent strategy for improving access to term finance in agriculture and rural areas. Although some examples of term financing can be found in African agriculture, the general lack of term financing in rural areas can be linked to the lack of general policy measures to enhance the environment for long-term financing, weak effective demand for rural and agricultural investment financing, and inadequate capacity of lenders to provide long-term finance to those clientele.
Highlights
Since 1970, there has been a shift from emphasis on agricultural credit to one of rural finance
I will cite three factors that have changed the way we look at rural finance today compared to the view on the 1970s
We identify three types of obstacles that limit the process of financial deepening in rural financial markets the enabling policy environment, risk markets and instruments, and institutional innovations and diversity
Summary
Since 1970, there has been a shift from emphasis on agricultural credit to one of rural finance. Depending on the region this trend may reflect a basic fact of agricultural progress (cheaper food and fewer farmers) or it may reflect the persistence of urban biased policies in developing countries This trend reinforces the shift away from agricultural credit to rural finance with a greater emphasis on products that meet household demands for investment, consumption, savings and insurance. The weaker loan repayment performance may be due to problems of weak enforcement of laws, and exposure to higher levels of individual and covariant risks This pattern suggests an unmet potential for increasing the effectiveness of MFIs and other rural finance institutions (RFIs) in rural and urban areas of Africa. The paper identifies the key gaps in rural finance, based on recent international experience, and relates these gaps to Africa
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