Despite urbanisation, a large proportion of the population of developing and transition economy countries and three-quarters of the developing world's poor people live in rural areas. Sustainable livelihood development in rural communities is, thus, an important process and requires efforts to help people improve their social and financial assets.

Financial assets enable households to make better use of other assets, such as their land, labour and skills. Financial services help people to build their financial assets and can also help to facilitate their transactions, solve cash flow problems and manage risk.

Rural finance is, therefore, about the development of financial services in rural areas. The rural environment does have a number of particular problems, e.g.

A lower spatial density of clients, compared with urban areas, and therefore higher transaction costs; A mix of economic activities in which agriculture (including livestock and fisheries) is often very important, with consequent higher levels of risk from uncontrollable factors and irregular cash flows from seasonal production; A tendency towards lower levels of human capital, especially literacy and numeracy, with women often being disadvantaged; A history of poorly conceived, sometimes politically-driven, rural lending that has left a residue of bad debts, weak portfolios and borrowers unaccustomed to strict interest and repayment practices; Poor infrastructure and long distances from markets, which limits economic opportunities and debt capacity.

These issues require close attention to policies, to the operations of financial institutions, to improving the design of projects and to finding ways of improving capacity building so that best practices are followed wherever possible. Information relating to many of these topics can be found here and in the publications of the FAO Rural Finance Group.

Policy Advise

We members need to build viable rural financial intermediation in rural areas by:

• Advising on the general policy and regulatory framework affecting rural finance, and particularly on financial sector policies and legislation;
• Advising on restructuring rural financial systems to include various types of institutions and ways of establishing more effective operational linkages between savings and credit and between informal and formal financial intermediaries;
• Advising on the appropriate role and methodology for crop insurance in overall agricultural development, with specific emphasis on risk management for credit-financed investment.

Topics include:

Agricultural Finance: Getting the Policies Right Better Practices in Agricultural Lending Sources of Funds for Agricultural Lending Prudential regulation and Supervision for Agricultural Finance Enhancing Farmer's Financial Management Skills Financing Agricultural Term Investments

Insurance of crops in developing countries

Risk management is of crucial importance of the investment and financing decisions of farmers in developing countries and in transition economies. Agricultural insurance, although one of the most often quoted tools for risk management, can only play a limited role in managing the risks related with farming. The applicability of insurance in any given situation is based on consideration of whether it is a cost-effective means of addressing a given risk. The acid test of developing and operating an insurance programme to complement other risk management measures depends on the cost/benefit ratio – to the farmer and to the potential insurance providers. The present publication is intended to provide insight into some of the more recent developments in terms of new insurance products and programmes.

Credit guarantees: an assessment of the state of knowledge and new avenues of research
Guarantee systems for loans, as substitutes for traditional collateral, have been proposed, planned and implemented in various countries. This book attempts to address the main issues relating to guarantee funds and to give examples from which lessons can be drawn. It comes to the broad conclusion that there are few instances in which a traditional loan guarantee service adds value in a sustainable way. New approaches to the guarantee concept are aired and proposals made as to how these innovative mechanisms could be implemented in different situations.

Inventory credit: an approach to developing agricultural markets
After liberalisation of agricultural marketing systems, private traders have taken over the marketing functions of government and parastatal bodies but frequently do not have ready access to finance for purchasing and storing the produce. Inventory credit offers one way of overcoming this problem. This paper examines requirements for successful inventory credit, drawing extensively on case-studies from Ghana, India, Mali and the Philippines. Legal issues are discussed in detail. The report cautions against targeting particular users and stresses that transactions should be profitable to both the lender and the borrower. In order to attract banks to inventory credit, it is essential to have reliable warehouse operators. The publication will be of interest to banks wishing to increase and diversify their clientele, companies involved in or interested in commercial warehousing, policy-makers concerned with trade and agriculture and donors.