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2.2 Modern Rural Finance: An Emerging Model Drawing from Microfinance Best Practices

Modern rural finance is a positive combination of rural and microfinance, taking the best from both. From rural finance, it has integrated the lessons learned from strategies coming from the poor households themselves to diversify their income sources.

Many studies performed in poor and remote rural environment show that the households' budget has tremendously changed during the last decade or so. Next to income from agriculture and livestock, resources from trade, salaries (seasonal), and remittances have taken a much larger share and sometimes have over passed the former ones. For instance, a recent study done by Enda Inter Arabe,[1] a MFI in Tunisia, showed that 44 percent of the revenues of rural households come from other sources that agriculture: day wages (34 percent), salaries (21 percent), retirement pensions (19 percent), or trade (15 percent). In agriculture, small farmers also tend to diversify in order to mitigate price and market risks. In Burkina Faso and Mali, in a cotton-growing region, farmers use the capital accumulated from good years in cotton to invest in fruit trees, irrigated vegetable growing, and animal fattening, which has after some years almost totally substituted for cotton.[2]

Since poor rural households have diversified their income sources, it is important to provide loans not for one specific productive activity but rather for all the diversified economies of such households. Therefore, in sound rural finance, loan analysis is giving more attention to cash flow than in the profitability of the agricultural production activity for which the borrower has applied for and the terms have been matched with incomes from all sources at the different times when they are available.

Small farmers are often confronted with technical difficulties related to production: soil fertility, inputs, crop or animal illness, and no access to counseling since the phasing out of state extension services. This is a major risk for them. This risk is being mitigated by access to private agricultural business development service (BDS) providers who are now operating on a fee for service basis, even in rural areas. The cost effectiveness of such services is a key element to success as it has to be affordable and adapted to the needs. Grouping clients per catchment areas to reduce time and costs for delivery is essential. Access to such agricultural BDS has re-opened the perspective of running crop and animal insurance schemes sustainably and of using insurance as a risk mitigant for small farmers.

Farmers are also confronted with climatic uncertainties that could affect their production. For many years, insurance schemes have been confronted with high costs for individual checking how crops have been affected in the fields. With progress in technology, costs for setting up mini weather stations in rural areas have been reduced significantly the costs of administration of payouts and therefore, insurance schemes based on weather indexes are now feasible. Satellitebased systems may give even greater opportunities for cost-reduction.

Health and access to health care remain a major risk for farmers since it conditions good working and productive conditions. Health microinsurance has been tested in different places by promoters, either by forming health mutual aid societies or for MFIs to partner as agents with insurance companies, to deliver this product to their clients. However, if the framework conditions are not favorable, provision of health savings and credit products could also serve as good risk mitigants.

In rural areas, being isolated is an important risk because services will be more expensive to be delivered, inputs will be more costly in retail, lobbying becomes inaudible by lack of critical mass, so is ability to attract buyers, processors, modern distributors. To address this risk, institutional strengthening of farmers' groups is essential.

  • [1] See GRET and CIDR, "Etude de marché pour le développement de produits pour servir les clients ruraux en Tunisie”, AFD research report (2009).
  • [2] See Monitoring report for a Rural Finance Project in the Western Region of Burkina Faso funded by EDF and implemented by CIDR (2007).
 
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