Rural Financial Services and Effects of Microfinance on Agricultural Productivity and on Poverty

This paper assesses the structure of rural financial services and the role of financial institutions in improving rural people's livelihoods in Bangladesh and Ethiopia. It highlights the contributions of microcredit and cooperatives in increasing agricultural productivity and moving out of the poverty trap. Access to rural financial services can make a difference in agricultural productivity, food security, and poverty reduction. However, an efficient, sustainable and widely accessible rural financial system remains a major development challenge in most developing countries. Study findings indicate that:

• Microfinance and financial services have played a vital role in improving rural people's livelihoods in Bangladesh and Ethiopia;
• Local financial systems in rural and urban areas have helped to promote self-help and independence;
• Poor technology and infrastructure, dependence on unreliable climate, small and fragile markets and precarious income flows deny access to financial services for many rural households;
• Efforts to develop rural financial systems and ensure its smooth operations would contribute to agricultural productivity and poverty reduction;
• Knowledge and experience gained from the operations of institutions like Grameen Bank in Bangladesh can be replicated in developing countries like Ethiopia.