Development of Rural Financial Markets in Sub-Sahara Africa

This document synthesises the experience with rural financial markets within and outside Africa, focusing on successful policies and programs. It explains the emphasis placed on rural financial market development, on financial intermediation, on the financial viability of lending institutions and sustainability of the financial systems, including the informal systems, serving rural households and enterprises. It presents a summary description of financial systems and rural financial services. It discusses the importance of interest rates, transaction costs, and risk management, as well as the role of governments and aid agencies. It summarises experiences drawn from country cases, as well as viable options for the sustainable development of rural financial markets. The author finds that:

• An increase in the supply of credit alone is not sufficient to ensure economic growth;
• The sustainability of financial markets and financially viable institutions is necessary for success, as well as collaboration between formal and informal financial institutions.

The paper recommends:

• Mobilization of household savings as the prime source of rural credit;
• Ensuring the financial viability of lending institutions;
• Taking caution in relation to directed/targeted credit;
• Maintaining flexibility in interest rates and lending margins so as to enable greater competition among savers, depositors, lenders and borrowers;
• Minimising state ownership and bureaucratic interventions.