May 15th, 2017

Inclusive finance and inclusive rural transformation

Published by IFAD,

This paper (PDF) in the IFAD Research Series provides an overview of concepts, issues and research on the relationship between financial inclusion and inclusive rural transformation. Liberalization of financial markets may not have had the desired spillover effects into rural credit. This indicates there may be justification for public intervention. Evidence shows that agricultural credit provides positive returns. However, according to the authors microcredit may not unto itself be a solution. Therefore, effective microcredit programmes might need to be coupled with outreach and technical assistance in order to achieve desired goals and objectives. Policies that curb interest rates or otherwise lower the cost of credit may encourage credit demand due to moderately inelastic to elastic demands. Other important issue that need to be considered for policies are collateral and risk, because risk-rationed farmers might either not borrow at all, or borrow less than optimal amounts of credit. Several solutions are presented to the farm credit problem, including subsidies and tax incentives, government-sponsored enterprises, risk-contingent credit and flex loans. Intervention policies should recognize that there is no one-size-fits-all credit policy, and policies should be targeted towards specific problems. For example, if subsidies are required, they must be smart in the sense of minimizing distortions in the marketplace or when markets fail, governments should consider government-sponsored enterprises to meet farmers’ credit demands.

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