In the majority of developing countries, cooperative credit associations can be found alongside universal and development banking institutions and other lending bodies, both formal and informal. Provision of comprehensive and useful financial services in rural regions, however, is often incomplete. In transition countries, rural financial services have in some cases completely broken down as a result of restructuring and privatisation. Opportunities to take out medium- or long-term loans are often completely lacking, as they are regarded as risky and are often associated with higher brokerage costs. Vital components of an efficient rural finance system – and thus important factors for rural development – include sensible interest-rate setting and risk assessment for loans, long-term refinancing facilities, fixed-term deposits and sufficient equity capitalisation.

Reducing risks – enhancing opportunities
For sustainable development in rural areas, it is important that credit be made available not only for agricultural activities but also to non-farm businesses. Other crucial criteria include gradually developing loan durations and volumes, developing a credit ‘culture’ by educating borrowers, building links with non-financial services, e.g. provision of agricultural inputs or support for product marketing. Lenders can also reduce many lending risks by diversifying their credit portfolios or developing loan insurance schemes. 

Rural finance is not just about providing agricultural loans. In the interests of improving economic sustainability, rural financial institutions should also encourage the population to save more. For poorer sections of the population in particular, savings products are often more useful than loans.

Strengthening rural financial services
Strengthening the rural financial sector provides agricultural producers in developing countries with better access to credit, and it provides rural households with better access to savings products and payment and insurance services. Important areas of action for GTZ in this context include:

• strengthening cooperative savings and credit associations, both in economic and institutional terms
• developing municipal financial institutions and making them more efficient
• developing sustainable agricultural credit and insurance products
• equipping small financial institutions in rural areas
• financing (agricultural) value chains.