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Better Practices in Agricultural Lending

Lack of access to formal credit and to full financial intermediation services impedes agricultural development and hampers the efforts to alleviate poverty in rural regions. Rural financial markets, offering the provision of both farm and non-farm rural lending services as well as essential savings deposit facilities, have not yet fully developed in most countries. However, new initiatives are being undertaken to meet the demand. They include the reform of agricultural development banks, enabling them to pursue a market approach in the delivery of credit services to small and medium-sized rural clients. At the same time, some microfinance institutions (MFIs) are attempting to transfer their urban microcredit technologies to rural areas.

Two recent developments have influenced these initiatives. The first one has been the adoption of a "financial systems" development approach. This emphasizes the need for an integrated approach to financial market development and the provision of competitive and durable financial services in local financial markets. A clear understanding of both client demand and existing informal financial services providers is required.
The second development has been the emergence of specialized microfinance institutions. Microenterprise credit programmes were initiated to address the unemployment problems that are associated with the vast rural-urban migration in developing countries. Initially, they targeted the promotion of self-employment and income-generating activities for the urban poor.

The evolution in microfinance, like the earlier one in rural finance, has been affected by the principles of financial systems development. Attention is on developing financial institutions that target low-income clients while pursuing commercial viability. The best known micro and rural finance institutions such as the Grameen Bank in Bangladesh and the Bank Rakyat Indonesia reach hundreds of thousands to millions of clients in urban and rural areas. In the course of time they have succeeded in reducing their reliance on subsidies. Although today only a few microfinance institutions have achieved full financial independence, many more use innovative credit technologies and have developed organizational structures that produce positive results. These initiatives illustrate the potential to overcome the financial barriers that commercial banks traditionally face when they try to lend to low income clients.

Although new financial institutions have been established that attend low-income clients, even in cases where services are extended to rural clients, small agricultural producers are only rarely attended. Lending practices that are able to address the challenge of financing small farmer clients are therefore needed. Drawing from the lessons that can be learned from microfinance and from successful microcredit practices, better practices in agricultural lending come up with practical cost reduction and risk management strategies. These strategies are described in "Better Practices in Agricultural Lending" here.

next  chapter: sources of funds in agricultural lending
last chapter: rural finance policies

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