Increasing finance and investment to rural areas is a vital part of addressing food security and poverty reduction. Rural finance encompasses the range of financial services offered and used in rural areas by people of all income levels. It includes agricultural finance, which is dedicated to financing agricultural related activities such as input supply, production, distribution, wholesale, processing and marketing. Agricultural value chain finance takes account of those inter-linked processes from farm to consumer and uses them and them to increase efficiency and lower risk in lending. Finally, microfinance provides financial services for poor and low income people by offering smaller loans and savings services, while accepting a wider variety of assets as collateral.
A number of factors continue to thwart the development of vibrant financial markets in the rural areas of most countries. The higher transaction costs associated with dispersed populations and inadequate infrastructure, along with the particular needs and higher risk factors inherent in agriculture result in an under-provision of financial services in rural areas. Further, where services are available, products are often designed without consideration for the needs and capacities of rural households and agricultural producers.
The inability of households and enterprises to access capital on competitive terms to undertake profitable investments, or take advantage of market opportunities, means that incomes and growth are lower than they need be. Without financial products and services to insure against risk, rural households and enterprises may even retreat from profitable projects for which they have adequate liquidity. The absence of competitive savings instruments and other financial services in rural areas leads to less productive forms of savings that cut further into households' scarce liquidity and dampen local growth prospects.
Expansion of rural financial services can create a win-win scenario that will promote growth while also helping reduce poverty. Given the high proportion of poor populations that live in rural areas, the growing income inequality between urban and rural markets, and concerns for food security and population vulnerability in rural communities, many development agencies are returning their attention to rural financial deepening as part of a strategy to stimulate rural private sector development.
New approaches, technologies and forms of investment are occurring. FAO is working on research and development of agricultural investment funds, investment promotion, guarantee funds and information communication technology to increase the level of investment while lowering the risks to investors.
The rural and agricultural finance specialists in the FAO Rural Infrastructure and Agro-Industries Division is dedicated to promoting improvement in rural financial services and agribusiness investment in developing and transition countries. Details of the work and publications can be found here. A much greater range of information and resources relating to rural finance and investment can be found in the Rural Finance Learning Centre which is managed by the FAO Rural Finance specialists.