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Chapter Six Agricultural Finance & Rural Credit Markets: 6.1 Why Do People Demand Credit in Rural Areas

1. Rural communities rely on credit to finance agricultural activities like procuring seeds, fertilizer, equipment, and hiring labor as most farmers lack capital. 2. Rural credit comes from both formal sources like rural banks and microfinance institutions, as well as informal sources like rotating savings and credit associations. 3. Providing financial services to rural communities and entrepreneurs is important for reducing poverty, increasing food production, and supporting rural development and national economic growth.

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468 views12 pages

Chapter Six Agricultural Finance & Rural Credit Markets: 6.1 Why Do People Demand Credit in Rural Areas

1. Rural communities rely on credit to finance agricultural activities like procuring seeds, fertilizer, equipment, and hiring labor as most farmers lack capital. 2. Rural credit comes from both formal sources like rural banks and microfinance institutions, as well as informal sources like rotating savings and credit associations. 3. Providing financial services to rural communities and entrepreneurs is important for reducing poverty, increasing food production, and supporting rural development and national economic growth.

Uploaded by

Hunde
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter six

Agricultural Finance & Rural credit markets

6.1 Why do people demand credit in rural areas

• Rural credit is vital to agricultural business because it gives


farmers access to capital that might not otherwise be available
to them.
• It help them to secure the
 seeds,
 fertilizer
 Equipment
 Land they need to operate a successful farm
 Chemical
 Hired non family labor
6.2 Sources of rural credit
• Formal .
• Rural /Village Banks
• MFIs
Informal
 Informal credit Associations –Iqub, Idir, mehabari, senbate

• Rural financial markets program carried with the support of various


donor agencies
• The target is to ensure a continued flow of cheap credit to
agricultural entrepreneurs through financial intermediation
mechanisms
1.Rural finance
2.Agricultural finance
3.Microfinance
Financial Sectors in rural consists
• In the most developing countries , the financial
system is characterized by the co-existence and
operation side by side of a formal sector and an
informal financial sector.
• The informal financial market is outside the
framework of national accounts.
• However, the majority of the rural population is
considered to be the direct beneficiary of the
informal credit sources.
 Agricultural activities are the main stay
 Low level of productivity
 Constitutes an emerging rural non-farm activities
 High level of poverty
 Underdeveloped infrastructure
 Poor entrepreneurial development
 Natural resource degradation
 Shortage of capital & poor saving habit leading to seasonal income
fluctuations
 Weak local government institutions
 The level of development of the rural economy in most of developing countries has
got a direct influence on the overall national economy.
 Thus, efforts and resources allocated in these countries to promote accelerated
economic development largely focus on the transformation and modernization of the
rural sector.
 A prominent obstacle to rural development is the problem of mobilization of
resources, which is crucial in achieving rapid economic growth of the rural economy
 The initial step in resource mobilization for development
purposes is the mobilization of financial resources that leads to
capital formation

 Since the rural economy represents a substantial proportion of


the country's human and natural resources, large amount of
capital is needed to help transform and modernize this sector.

 Rural financial institutions are, thus, relevant financial


institutions which are designed and expected to encourage and
mobilize savings and also channel such savings into income
generating activities in the rural areas and providing other
essential financial services such as money transfer.
 Rural finance is an effective tool of poverty reduction and rural
development.
 Rural credits are considered as very important means of increasing
investment capacity of farmers for increased employment and food
production thereby alleviating poverty, famine and hunger.
 Microfinance’s main aim is the provision of financial
services to the entrepreneurial poor. Most MFIs provide
limited range of financial services. The financial services
include:
 Micro loans
 Micro savings
 Micro insurance
 Money transfer (payment)
 Pension fund management, etc…
Microfinance activities

 Small loans, typically for working capital


 Group guarantee or compulsory savings as substitute for
collateral
 Access to successive larger loans based on repayment
performance
 Streamlined loan disbursement and monitoring
 Secure voluntary savings, products
 Informal appraisal of borrowers & investments
 Group solidarity loans
 Individual lending – larger size, loans to small
business graduated from MFIs, loans to employee
 Members owned & managed lending
 The ability to borrow, save and earn income reduces
economic vulnerability particularly for women and their
household.
 Reduce poverty through increasing income, smooth
consumption flows, expand asset base and improved
living conditions such as:
 Improve health care & nutrition
 Women’s empowerment
 Improve children's education, etc.
 Successful MFIs have manifested that the poor are
bankable and banking with the poor can be profitable and
sustainable.
The strength of MFIs lies in:
 The ability to develop demand driven products
 The ability to reduce transaction costs
 Monitoring mechanisms and to manage environmental,
socio-economic, cultural and other risks
 Allocate scarce resources efficiently
 Make their resources grow continuously.
 Shortage of loanable fund to address the growing demand
 Limited capacity for smaller MFIs in expanding outreach to
new areas
 Weak linkage between MFIs & banks
 Poor saving culture
 Underdeveloped credit culture - belief that credit should be
donation
 Growing drop out rate due to poor group formation and
preparation
 High illiteracy lends - making training & awareness very costly
 Lack of adequate information for loan processing
 Absence of bank branch network and hence high travel cost
contd.,

 The major challenges of rural/microfinance


institutions can be summed to the concept of
“Critical Microfinance Triangle” [Zeller and
Mayer(2002)], which requires the need for any
MFI to manage simultaneously the problem of
outreach, financial sustainability and impact as
shown below:
Contd.,
 Outreach – reaching the poor in terms of both number
and depth
 Financial sustainability – meeting operating and financial
costs over the long-term
 Impact – having observable effect upon clients’ quality of
life

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