Rural Finance for Food Security for the Poor: Implications for Research and Policy

The paper examines the potential for improving household food security by providing access to financial services. It is based on a review of theory at household and institutional levels, empirical evidence on borrowing and savings behaviour of the rural poor, and of the experiences of selected innovative financial institutions that provide services to the poor.

The authors suggest that:

• Financial services could help prevent both transitory and chronic food insecurity by stabilising consumption;
• By providing access to credit, savings, and insurance services, households could acquire inputs, labour, and equipment to generate additional income;
• Access to financial services could increase households capacity to bear risk, enabling them to invest in new agricultural technology and off-farm enterprises.

The paper concludes that:

• Promoting innovations and institution building in financial markets for the poor must be an integral component of development policy;
• Providing credit targeted to production alone is a futile exercise because of the fungibility/transferability of resources at the household level;
• The willingness of household to pay for such services is not often addressed by traditional credit programmes;
• There are significant constraints to broaden the role of rural financial services for the poor, such as information asymmetries that cause problems of moral hazard and adverse selection, which in turn lead to high unit transaction costs, covariate risks, and lack of collateral;
• Economic policies and institutions set the framework for financial market development. Competitive market principles, macroeconomic stability, liberalisation of financial sector policies, and a reliable and enforceable legal and regulatory framework are key requirements of successful financial market development.

[Adapted from authors' abstract]