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What is Rural Finance?

Posted in Tanzania forum

Rural finance is an umbrella term, which comprises a broad range of financial vehicles, including but not limited to;
•Savings Banking
•Money transfer and payment services

Which are offered to be used by the rural individuals, households, and small enterprises? In African countries, the term mostly encompasses various agricultural finances.

Agricultural Finance
As discussed above, rural finance is usually referred to as agricultural finance in the developing countries like Africa, which relates to the financial services including short-term and long-term loans for farming and livestock, covering the full agricultural value chain as;
•Input supply
•Marketing, and also
•Insurance to the agricultural and livestock products and resources.

Rural finance deployment
The rural financing is usually offered by formal (government) and informal (mostly private) financial institutes as well based on the financial arrangements inside the agricultural value chain itself. We can see that a significant share of the population in Africa is located in rural areas and mostly dependent on farming for their living. For long, there is an inadequate supply of viable financial services to this sector, which on an average is accounting for hardly 5 percent of the domestic resources allocated to the entire agricultural sector.

The fundamental reason for the lack of adequate access to the financial services in rural areas is that the agricultural value chains are enormous. These can be seen at an uneven and slow entry of financial institutions at the rural area, which further leads the rural people beyond the reach of the commercial outlets. When this is the case at one hand, on the other, the financial institutions are also most of the times reluctant to provide financial services to baseline rural and agricultural activities where the actual risk profile of these are not entirely understood.

The other factors contributing to the slower pace of rural financial spread are widely dispersed population and inadequate infrastructure facilities, which raise the information and transaction costs higher. The titles and property rights are also so difficult to verify at the rural sector, which again poses problems in the valuation of collateral. The subsidised lending systems for rural population have also obstructed the development sustainable rural banking in Africa.

Key terminology related to rural finance
=>Rural economy - Rural Economics is the study of local standalone economies; which mostly comprises of farming, livestock, and non-farm industry, as well as the development, economic growth, and size and distribution of production and interregional trade.

=>Rural credit – It covers any lending methods or line of credit, which impacts the rural population in one or other way. There are rural banks and co-operative societies, which specialise in offering these types of small loans to farmers etc.

=>Rural indebtedness – It is the indicator of a weak and unstable financial infrastructure, which reflects the inability of an economic system to reach to the need rural people, farmers, a landless citizen living in the villages, and agricultural labourers.

However, things are changing largely regarding rural finances recently with the initiatives taken by the bigger financial corporations and the government to ensure a fair spread of agricultural finance and economic growth.

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