Beruflich Dokumente
Kultur Dokumente
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Abstract
that incomes and growth are lower than they need be. Without market instruments to insure
against risk, farmers households and enterprises may even retreat from profitable projects for
Main objective of this study is to identify unique features of the agricultural sector and
the rural economy that present challenges formal of rural finance; to look at how these affect
the provision of sustainable rural financial services and, thus, determine the key elements of a
strategy for successful and sustainable rural and agricultural finance. Other goals are defined
as: to overcome the existing structural obstacles of financial markets for efficiency of
and recommendation to government policy for efficient and sustainable rural and agriculture
financial sector.
Introduction
In today’s economic situation the main priorities in rural development are the establishment of
and improving the quality of life in rural areas. The most important engine of the rural economy is
agriculture, and the diversification of economic activities through the creation of small enterprises, the
development of alternative agricultural activities are the main prerequisites for promoting
growth of businesses, increasing the income of the population and reducing poverty in rural areas. The
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effective provision of financial services allows for the flourishing of entrepreneurship, innovation and
production in rural areas. The improvement of the access to finance facilitates the introduction of
modern agricultural technologies and production models to improve the possibility of agriculture to
The main purpose of this article is by identifying certain characteristics of the agricultural
sector and rural economy and the current challenges facing rural finance, to find out what are the
impacts that will ensure the sustainability of rural finances and financial services, and to determine key
elements of the strategy for successful development of sustainable agricultural and rural finance. Other
objectives of the study are: to overcome the existing structural barriers and problems in the financial
markets to ensure the efficiency of agricultural credit and use to the same degree of technology
specific to financial markets; to offer views on the state policy in achieving effective and sustainable
Rural finance includes the full range of financial services offered and used by people in rural
areas, at all income levels. They are the specific element of the countries’ financial sector. These
include agricultural finance, aimed at providing funds for financing agriculture-related activities in
manufacturing, supply, distribution, trade and marketing of agricultural produce. Another key element
is the microfinancing, the provision of related financial services to people in rural areas, including
lending, savings and insurance services, etc. The modern concept of microfinance comprises also
economic and social aspects. It is seen as a tool to combat poverty and unemployment in rural areas, a
means of financing young entrepreneurs, a means to develop alternative activities and to build
sustainable enterprises in rural areas. Figure 1 is an attempt to illustrate the relationships involved in
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Financial sector
Rural finance
Agricultural Micro-
finances financing
defined and functioning financial market in rural areas. Higher transaction costs, uneven distribution
of the population, underdeveloped market and social infrastructure, risk factors inherent in agrarian
development hamper the provision of financial services in rural areas. Often financial services are
provided to households and industry in rural areas without taking into account their needs, capacities
and capabilities.
The difficult access of households and businesses in rural areas to capital at competitive terms
and the lower return on investment does not allow them to undertake profitable investments or to take
opportunities. Without market instruments to protect against risk, rural households and enterprises may
not even realize the potential projects, even if they are able to provide liquidity. Underdeveloped
financial services in rural areas lead to diminished opportunities for saving and borrowing, which
limits their liquidity and growth opportunities. In this sense, the expansion of the provision of financial
services to rural households and businesses can be a good opportunity for promoting growth and
reducing poverty in rural areas. Taking into account the fact that the rural population is poor, the
growing inequality between urban and rural communities and their market opportunities, the
deteriorating rural infrastructure, and the greater vulnerability of the population of the villages, it can
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be concluded that it is worth talking a more profound look at their problems, in order to stimulate
The effective functioning of rural finances requires clarification of their characteristics and the
related problems. Rural financial markets do not always function efficiently because of the high
production and price risk, the existence of asymmetric information between subjects and the high level
of transaction costs. Offering some tools, such as subsidizing part of the interest on agricultural loans
and the lack of proper understanding on the part of financial intermediaries of the characteristics of
rural financial markets, restrict the access of small and medium-sized companies and make them
undesired customers.
One of the primary reasons for the poor functioning of rural credit markets is the combination
of high levels of production and price risks and limited opportunities for mitigation. For example, by
assuming financial obligations farmers and small entrepreneurs become subject to constant change,
which can lead to unintentional non-compliance in relation to loans. In the lack of adequate tools to
reduce risk (eg through guarantees, insurance, futures, etc.) financial intermediaries are forced to
withdraw from rural areas or to develop a mechanism to solve their problems by other means (eg by
Another important reason for the underdevelopment of rural financial markets is the
asymmetric information. Asymmetric information occurs when the two contracting parties do not have
the same quality and quantity of information. The high cost of information as a resource in some cases
does not allow farmers and entrepreneurs to acquire it, and this is reflected in the valuation and risk
management. At the same time, very often in rural areas there is no background information of
economic entities receiving loans, which complicates the assessment of their loan capacity.
A third reason lies in the high transaction costs arising from the physical and institutional
environment. Rural areas are characterized by high levels of poverty, spatial fragmentation of
production, seasonality in the realization of income from economic activity, lower degree of legal
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enforcement of contracts, underdeveloped infrastructure, low levels of education and culture of the
population, etc. These features increase the transaction costs for both parties.
To some extent these common problems of rural finance indicate that financial intermediaries
are not so willing to be present in rural areas. This explains also the fact that even in a highly
competitive financial market, small farmers and entrepreneurs are less undesired as clients compared
to those with high incomes, large-scale activity, credit history, providing traditional collateral.
The study of the development of rural finance allows to identify several problems with a
specific character, namely: there is limited access to short-term loans, there is market segmentation
and lack of competition, there is limited supply of medium and long term loans, a relatively limited
The limited access to short-term loans can be explained by several factors, namely: low
profitability of many farming and other entrepreneurial activities carried out in rural areas; the fact that
land is not accepted as collateral in case of insufficient liquid assets; less developed and often costly
formal mechanisms for implementing agreements and commitments; lack of awareness of businesses,
etc. Rural businesses that do not generate sufficient reserves to cover their financial obligations are of
little interest to credit institutions. Low prices for agricultural products, along with deteriorating
infrastructure, low level of technical equipment and technology and higher marketing costs limit the
markets and the insufficient subsidies to local farmers reduce the profitability of economic activity and
slow down the turnover of capital. Last but not least, the high costs of financial intermediaries to
gather information and credit history is a serious constraint affecting mostly small farmers and small
entrepreneurs.
The segmentation of the rural financial market includes most often a model whereby the
major financial institutions (banks, insurance and leasing companies) tend to serve well equipped
customers with a high degree of credibility, while intermediaries relying on informal connections
(some finance houses, credit cooperatives, etc.) target customers with lower incomes and fewer
opportunities for providing collateral. The lack of sufficient competition and the manifestation of less
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interest on the part of a specific group of intermediaries, especially as regards micro-loans, can lead to
the exercise of monopoly power, which can render the provided financial services significantly more
expensive. Thus, customers with the same demand for credit and the same risk profile can benefit from
different terms of financing, depending on their source of funds. Causes of such segmentation can be
found in the gaps in the legislation relating to lending activities, as well as in the limited opportunities
The limited supply of medium and long term loans is slowing the economic development of
businesses in rural areas, particularly farmers. The cultivation of perennial crops, livestock,
construction of irrigation facilities and the purchase of technical equipment requires substantial
investment, long payback period, which increases the risk of credit institutions, especially in the
absence of appropriate tools for its management. This naturally leads to a decrease in the desire for
medium and long term lending. This fact is reinforced in times of economic crises and macroeconomic
instability associated with rising inflation and interest rates in the economy. Medium and large
producers and processors in rural areas have greater flexibility with regard to medium and long-term
credit financing, but most do not have opportunities to benefit from joint funding or bonding. At the
same time making long-term investments by small farmers and entrepreneurs is significantly narrower,
which prevents the introduction of new technologies, modernization of equipment and provision of
greater opportunities for profit. Thus the growth of the most popular forms of businesses in rural areas
is inhibited, which are expected to be a major generator of employment. It should be noted that
microfinancing can have a lower technological capabilities to solve the problem of offering long-term
loans mainly because of the lower fixed-term savings base. However, a consistent state policy on
agriculture and rural areas may to some extent overcome the problem of lower demand for long-term
financing. The implementation of plans for rural development and the investment of significant
resources from the Cohesion Funds of the European Union in recent years has shown that access to
long-term financing is expanding for a wide range of economic entities operating in rural areas. Banks
get greater collateral. Farmers and entrepreneurs have the opportunity apart from developing their
economic activities also to implement projects for the diversification of their activities, for the
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In rural areas there is limited supply of other financial services, including deposit operations,
insurance, leasing and other activities which hinders the ability of economic agents operating in them
to effectively manage risk and liquidity. Often customers from the villages are forced to use loans as
an expensive substitute for missing opportunities to use insurance or liquid savings. This results in
reduced welfare and restrictions in business development. The reasons for the insufficient
development of this type of financial instruments in rural areas can be found in the absence of legal,
institutional and economic conditions. Recent innovations in financial services are credit cards, loans
against pledge of securities, development of the lease system. Offering this innovative range of
financial services in rural areas, however, is limited because of the high costs associated with their
sale.
In order to improve the functioning of rural finance may recommend activities in three main
groups:
- Maintenance of prudent fiscal, monetary and trade policy reduces the macroeconomic and
- Limiting the legal impediments to the financial activity and performance of contract;
- Improving the quality and quantity of information and awareness of the rural population
II. Increasing the retail capacities of financial intermediaries in rural areas by:
banks, credit unions and cooperatives, insurance companies, government agencies and others;
III. Promoting the establishment and offering more financial services and innovation other
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- Development of the deposit instruments and services;
- Development of insurance and hedging instruments and increase the insurance culture of
achieve sustainable performance over the long term the desire to take advantage of certain subsidies to
a point;
- Achievement confidence and trust in contracts and legal incentives about it.
rural areas;
more – to reduce costs for farmers and entrepreneurs and to improve their access to credit;
- Financial support to all economic agents that are connected by supply chain or network.
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REFERENCES
1. Agricultural Finance and Credit Infrastructure in Transition Economies , focus on the South East
2. Boevsky, I., Importance of Microfinancing for the Struggle with Poverty and for the Development
of Rural Regions (2007), Economy and management of agriculture, Vol. 5, pp. 18-23.
3. Gozabie, G (2009). Sustainable rural finance: Prospects, challenges and implications, International
4. Innovation in Rural and Agriculture Finance (2010), Focus 18, World Bank
8. Rural Financial Services, Implementing the bank strategy to reach the rural poor (2003), Report No
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