Planting seeds for the future: The challenge of rural finance

by Patricio Zamorano
Source: IADB
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The conference ” Cracking the Nut: Overcoming obstacles to Rural and Agricultural Finance”, organized by AZMJ and hosted by the Inter-American Development Bank (IADB), culminated with the goal of generating better conditions for micro-finance projects in rural areas in developing countries. The event took place in Washington DC this past June 20-21, 2011.

The event brought together a broad group of international experts currently involved in the development of rural finance programs in the public and the private sector, as well as representatives of civil society organizations, donors, and technical experts in the field.

Discussion topics

The conference focused on five central themes. In discussion surrounding the first theme, “Making Markets Work for Rural and Agricultural Finance”, panelists analyzed the challenges and constraints that face rural micro-finance organizations in their relationships with markets and public policies.

The specialists emphasized the fundamental need for a series of effective and coordinated strategies to empower value chains, especially in vulnerable sectors with low access to credit and other financial resources. There was a general consensus that the role of micro-finance organizations should go beyond the provision of loans by identifying opportunities for strategic partnerships between all actors included in the production process, distribution chains and sales to the final consumer, in addition to supporting the management of cooperatives through training in accounting, soil management, irrigation techniques, and the application of low-cost technologies.

The second theme, “Forging Agricultural Finance Innovations”, focused on analyzing best practices to face market and production challenges in the area of rural finance. Among the greatest challenges are increasing energy costs; a lack of access and knowledge about financing options affordable to small producers; food scarcity, and restricted access to water sources. Another issue discussed was the difficulty of generating financing alternatives for middle-income sectors in rural zones. Panelists pointed out that in some cases, while micro and large-scale producers have been able to obtain sufficient levels of financing, medium-scale producers have not. Representatives of organizations from different countries pointed out that support for these middle-level sectors has progressively become a priority, as it has become clear that they have systematically benefitted less from integral development strategies.

In discussion of the third theme, “Reducing Costs of Rural Outreach”, experts discussed the use of several technological innovations that possess the potential of decreasing costs and increasing the market penetration of lending and financial products. Several panels emphasized the cost benefits of wireless banking processes and personalized approaches, such as bank representatives who visit local communities, especially in areas of difficult access. Also, in order to ensure the efficient capitalization of loans panelists also detailed cost-cutting strategies, in areas like pest control; efficient irrigation; productivity maximization in contexts of limited access to arable land; the application of alternative energy sources such as solar and wind power; and support from the state for improving local transportation and communication infrastructure.

“Managing Risk Effectively” was the fourth area of discussion, focusing on the challenges facing financial lending institutions, such as loan insurance, savings, and chain values. Discussion was enriched by the presentation of specific cases from rural communities in countries as diverse as Sri Lanka, India, Tanzania, Colombia, Peru and Mexico, among others. Dozens of models of rural lending were discussed, accompanied by an evaluation of the availability of different insurance programs, repayment systems, and risk mitigation strategies, through a comparison of examples from Africa, Asia and Latin America. In several panels, experts warned about the limited existence of insurance markets and similar products related to the agricultural production for small and medium-size producers, leaving them especially vulnerable in comparison to large-scale producers with greater access to financial resources.

Participants also discussed problems arising from the high level of volatility of the rural sector, and the unpredictable climate conditions that especially affect the vulnerable areas where many of these projects are implemented, limiting recovery and mitigation after natural disasters. Despite these obstacles, experts highlighted the potential of insurance programs targeted towards the poorest agricultural areas in developing countries, where only a minimal percentage of small and micro-producers know or use these products for protection.

Under the fifth subject, “Attracting Private Investment”, panelists advocated for the use of attractive micro-financing programs in order to encourage rural and agricultural development in poor countries. One topic that received much attention was a discussion about the scope of state versus the private business activity in rural zones. Both positive and negative experiences were related surrounding this relationship. While governments were in several cases criticized for creating market distortions through regulatory measures, it was also said that private institutions in occasions fail to provide services to people living in isolated areas. On the other hand, panelists recognized the crucial role of governments in generating effective public policies where markets have failed. Likewise, others related the dynamic impact of private entrepreneurship in providing poor areas with the potential for lending and banking development projects in cases where investors and donors are willing to assume a minimum level of risk and the state generates incentives.

Amongst conference participants, there was a general consensus that the agricultural sector is vital for the economy of countries, especially in the developing world, as it can positively impact GDP and fiscal revenues, and support such critical areas as food provision, water availability, ecological balance, and natural resources management. Rural micro-lending programs were affirmed to be an effective strategy for decreasing poverty levels in low-income countries,

where the rural economy is especially affected by high levels of economic risk and social vulnerability.

Successful cases: seeds that have flourished

Inspired by the title of the international conference “Cracking the Nut: Overcoming obstacles to Rural and Agricultural Finance”, participants presented several successful projects in rural finance, credit access, and community organization.

  • In Sri Lanka, Hatton National Bank has implemented a successful program called “barefoot bankers”, where bank representatives personally interact with rural communities to address all issues and needs related to lending programs and technical assistance financed by the bank. The program has over 150,000 clients in its portfolio.
  • In Nicaragua, an institution called Fondo de Desarrollo Local, which boasts 57% female participation, has developed a system of differential interest rates between the urban and rural sectors, with higher rates from loans given in urban areas going to support subsidies that provide rural areas with less expensive loans.
  • In Paraguay, the micro-credit firm Financiera El Comercio, a pioneer in the development of rural micro-finance in that country, has achieved 105,000 clients, after three decades of operation. The institution has more than $100 million in its portfolio, with a distribution of 70% rural and 30% urban loans, managed through 50 customer service offices and 250 authorized agents.
  • In Peru, Root Capital increased the average incomes of more than 500 farmers through its micro-credits program, from $312 per farmer per year in 2005 to $3,803 in 2009. Also in Peru, a pilot program developed by Proyecto Capital achieved a significant increased in the savings rates among the women of the San Jerónimo community. At the beginning of the program, 84% of women participating in the program did not have savings accounts. One year later, only 5% did not save.

For more information about the event, please visit: