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close this bookRural Finance and Poverty Alleviation - Food Policy Report (IFPRI, 1998, 32 p.)
View the document(introduction...)
View the documentPreface
View the documentIntroduction
View the documentClient Profile
View the documentCommitting Public Resources to Rural Finance
View the documentInformal Markets: What Lessons Can We Learn from Them?
View the documentPublic Policy: Supporting Institutional Innovation
View the documentConclusions
View the documentNotes


This report presents information on the credit constraints that poor rural households face, derived from detailed rural household surveys conducted by IFPRI and its collaborators in nine countries of Asia and Africa (Bangladesh, Cameroon, China, Egypt, Ghana, Madagascar, Malawi, Nepal, and Pakistan). It uses this information to make the case for appropriate public intervention in strengthening rural financial markets and draws conclusions about areas where public resources may best be spent. It describes how informal, often indigenous institutional arrangements - from savings clubs and lending networks to small retail shops and input dealers - have succeeded in tailoring savings, credit, and insurance services to the poor. What enables informal institutions to provide sustainable financial services that banks and cooperatives in the formal sector institutions, with few exceptions, fail to provide? What are their strengths and weaknesses? What lessons can formal sector institutions draw from them? The report argues that the basic problem lies in institutional arrangements, summarily transplanted from urban-based formal banking systems, that have high transaction costs for lenders and borrowers alike. For the lender, these costs are incurred in screening large numbers of borrowers, monitoring and enforcing unsecured loan contracts, and managing tiny savings deposits. For the borrower, these costs take the form of time and other resources spent securing loans or making deposits, or inappropriate deposit or loan terms. Finally, the report looks at examples of recent institutional innovations that overcome some of these obstacles. It concludes that just as there is a role for the public sector to develop or support science-based technologies, concerted public action is also needed to create an enabling environment in which institutional innovation is encouraged and given more room to spread. Governments, donors, banking practitioners, nongovernmental organizations, and research institutions must work together closely to pinpoint the costs, benefits, and future potential of emerging rural financial institutions.

The report presents empirical results and conclusions from a multicountry research program at IFPRI, that began formally in 1994. Many IFPRI staff and collaborators from other research and government institutions have directly or indirectly contributed to the country case study research and synthesis work. Rosanna Agble, Joachim von Braun, Sumiter Broca, Franz Heidhues, Eileen Kennedy, Zhu Ling, Sohail Malik, Charles Mataya, Mohammed Mushtaq, Ellen Payongayong, Alexander Phiri, Zillur Rahman, Gertrud Schrieder, Simtowe, Rosetta Tetebo, Tshikala Tshibaka, and Jiang Zhong Yi all contributed. We also thank Lawrence Haddad and Bonnie McClafferty for comments, and Phyllis Skillman for editing this manuscript.

Financial support for the cross-country synthesis of results was provided by the Ministry of Economic Cooperation and Development (BMZ), Federal Republic of Germany and the German Agency for Technical Cooperation (GTZ). The individual country studies were supported by the following donor agencies: Bangladesh, Cameroon, China, and Madagascar (BMZ and GTZ), Egypt and Pakistan (U.S. Agency for International Development [USAID]), Malawi (UNICEF, The Rockefeller Foundation, GTZ, USAID, and since 1998, Irish Aid), Ghana (USAID), and Nepal (USAID, Win-rock International, GTZ, and International Development Research Centre).