Rural finance : issues, designs, and best practices

Abstract

This report is intended to serve as a sourcebook to aid decisionmakers as they create environments conducive to the development of rural financial markets. As a sourcebook, it explores both the traditional and new approaches that governments have taken to rural finance. First, the report outlines the traditional approach to rural finance, which relied heavily on supply-led, state-- owned agricultural credit institutions. Second, it highlights how widespread, urban-based policies impeded rural development and the promotion of rural financial markets. These policies included overvalued exchange rates, inflexible price controls on food produce, underinvestment in rural infrastructure, and protection of domestic industries against import competition. The report then illustrates the emerging new approach, which focuses on creating a favorable policy environment in terms of the macroeconomy, agricultural and financial sectors, rural development, and the legal and regulatory framework. Moving to the institutional level, the report offers two primary criteria -- outreach and self-sustainability -- as the bases for assessing the performance of rural financial institutions. It reviews and analyzes the modes of operation and performance of three successful rural institutions in Bangladesh, Thailand, and Indonesia. These three case studies provide insights for the design of future interventions.

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