The majority of the world’s poor live in rural areas. Yet most lack access to the range of financial services they need. Financial services available to them are relatively costly or rigid, whether from formal or informal financial providers or traders and agricultural processors offering input credit. Financial institutions seeking to work in rural areas face numerous constraints, such as poor infrastructure and low education levels. Moreover, the main products of many microfinance institutions – short-term working capital loans with frequent expected repayments –are not well-suited to seasonal or longer-term agricultural activities.
The recent introduction by some donors of the financial systems approach in micro and rural finance –which emphasizes favorable policy environment and institution-building –has improved the overall effectiveness of rural finance interventions. But numerous challenges remain, especially in agricultural finance.