While state-supported agricultural credit systems have proved inefficient and shrunk in size, private banks and cooperatives have not yet filled the gap, leaving rural farmers and entrepreneurs in many developing countries without access to credit. Public investment in rural financial institutions that serve the poor is justified and necessary, but short-term financial success alone is not a policy objective in itself. Effective rural finance policies must be judged by their contributions to both economic growth and poverty relief. Requiring borrowers to put up physical collateral and fill out substantial amounts of paperwork ignores the realities of the rural poor. Poor people cannot afford to risk their limited holdings of land or livestock, and illiteracy makes bureaucratic paperwork a daunting obstacle.
Local approaches work best.
There is no single blueprint for providing financial services to the poor that works in every location. However, technical support and training for the poor are preconditions for success. Community financial institutions should be controlled by their members and encouraged to experiment with different approaches to providing financial services and with various savings strategies. Regulations to protect savings and to minimize loan defaults are necessary. Interest rate subsidies are unnecessary.