Rural and Agricultural Finance Overview

The majority of the world’s poor live in rural areas. Yet most lack access to the range of financial services they need. Financial institutions seeking to work in rural areas face numerous constraints, such as poor infrastructure, dispersed demand, price and yield risks, and collateral limitations. Moreover, the main products of many microfinance institutions—short-term working capital loans with frequent expected repayments—may not be well-suited to longer-term agricultural activities, nor the resultant seasonalities in the cash flow of rural households.

Not all rural finance is agricultural or microfinance and not all agricultural finance is rural. Yet, financial service providers offering rural finance (financial services used in rural areas by people of all income levels), microfinance (financial services for poor and low-income people), and agricultural finance (financing of agriculture-related activities, from production to market) often have overlapping objectives and opportunities. The clients served by microfinance are often the same clients or households that would benefit from increased rural or agricultural finance.

The financial systems approach in micro and rural finance—which emphasizes a favorable policy environment and institution-building—has improved the overall effectiveness of rural finance interventions. But numerous challenges remain, especially in agricultural finance.