Improving access of rural poor to credit

Access to financial services improves the incomes and of an opportunities for the rural poor and provides support to tide families over difficult times. Access of the poor to credit could be increased through specialized banks, including agricultural banks, cooperatives, semiformal credit agencies and informal lending networks.

Rural areas are generally ill-served by credit services, so that supply of credit to the poor – both those engaged in agricultural production and those pursuing other economic activities – depends on the development of lending institutions. But rural credit institutions tend to be geared to farmers who own land and usually insist on real estate or physical assets as a collateral; naturally the very small farmers and the landless rural poor do not have this collateral.

Two major groups within the rural poor can be identified for banking purposes: the bankable poor and the non-bankable poor. The former are often in the subsistence sector with small commercial sales. They have a very small level of savings and loan demands. Banking business with them has high transaction costs. For this reason, they are not served by commercial banks. Nevertheless they have some saving capacity and access to some resources. Because of this, the bankable poor may engage in banking operations in a business-sound basis. In contrast, the non-bankable poor include very poor farmers on marginal land who have very little investment opportunities or resources to draw upon. They need assistance on a partial or matching grant basis, which may be made to groups for group projects. In this way, capital formation can be induced. In cases like these, the donor or the state does not expect repayment although members can repay their group (for a revolving fund) in cash or in kind.

Although in the past formal financial institutions have not reached the poor, experience as well as pressure from international financing agencies have more recently triggered changes in policies and programmes for input supply and rural finance. Many countries are now pursuing a bottom-up approach to rural finance and credit to small farmers, livestock raisers and women. Such policies focus on savings mobilization, on a finance policy which is demand-led and on institutional viability. The International Fund for Agricultural Development (IFAD) has developed a system of providing credit, often in very small amounts, for the poorest and most marginalized groups that has benefited over 230 million people in nearly 100 developing countries.

The farmers in Vaishaili Area Small Farmers' Association (VASFA) formed a registered society, procured bank loans and bought equipment they needed such as a tractor and other implements. This prevented their exploitation when hiring equipment from others.

For the poorest of the poor, financial services must be offered in combination with other programmes such as training in basic literacy, enterprise management, and education in nutrition, health and family planning.