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The rural areas are home to most of the poor population in the whole world. However, most do not have access to essential financial services. The standard financial products are usually too rigid or relatively expensive to be used by rural residents. Moreover, financial institutions usually expect short-term capital loans along with frequent repayments are not really well suited for long term or seasonal agricultural activities, and this is where rural finance comes in.
What exactly is Rural Finance?
Rural finance essentially refers to the range of financial services meant to be provided and implemented in rural regions by all people, regardless of income levels. One of the common sub-sets of rural finance is agricultural finance, which is specifically dedicated to offer financial solutions to agriculture-linked activities, from input supply and production to distribution and marketing. Providers of rural finance include both the leading financial institutions, like credit unions and banks, and other non-financial options like NGOs.
Uses of Rural Finance
Rural finance is specifically designed to be used by rural people to offer the following key benefits:
Reduce Side-Selling
Third-party selling occurs when farmers, like coffee farmers, who are obligated or contracted to sell their products to a specific buyer, start selling to other buyers. It is a very significant issue that faces rural contract farming arrangements since enforcing contracts with small scale farmers is impractical or too expensive. The solution is to provide adequate rural financing options and competitive prices to maintain the contract.
Improved Fixed Asset Finance
One way in which rural finance is being used is to offer financial leases, which are seen as close alternatives to loans that offer several benefits for both clients and providers. Leasing is particularly important in middle income and developing countries as it provides small-scale farmers the essential equipment they need to enhance production through adding more value to the production process.
Reduce the Vulnerability of Households to Shocks
In cases where a sudden shock occurs, like an illness that affects the breadwinner that requires more expenditure compared to the available cash, the household must look for ways to finance the deficit. The traditional coping methods like using working capital, informal borrowing or selling assets can prove expensive in both the short and long term period. Rural finance is the best solution as it has better financial product that can reduce the shock of these kinds of events.
Integrates Poorer Farmers
With the traditional value chain financing projects, most of the targeted small holders were those with enough land and adequate access to resources to start a commercial farming transaction. The subsistence farmers were mostly neglected, just like the more destitute and vulnerable households. Through rural finance, these poorer rural residents can get better support to compete with other small-scale farmers.
All things considered, rural finance is an essential financing option for rural residents as it is filled with numerous benefits to help enhance their livelihoods. However, there is still more work to be done in developing better collateral requirements when establishing the capacity to borrow rural loans.