Rural Financial Services for Poverty Alleviation: The Role of Public Policy

This policy brief aims to identify policies and institutional arrangements that help the poor integrate themselves into sustainable savings and credit systems, in order to increase their capacity to invest, bear risk, and preserve their livelihoods.

The brief discusses the need for financial market reforms and the role that informal credit and savings associations play in the provision of financial services. It suggests that:

• Programs must be designed to harness a community's particular strength, which will help reduce cost of screening participants, estimating credit-worthiness, monitoring financial activity, and enforcing contractual obligations;
• Public policy should play a role in promoting technological innovations that generate social benefits as well as help promote institutional innovations that assist the disadvantaged or address intrinsic market failures;
• Public policy should be willing to support and evaluate experimentation process and nurture those designs or institutions that hold promise of future success.

The brief concludes that in the long run, the payoff to public investment in institutional innovations will be the transformation of MFIs into full-fledged, financial intermediaries that offer savings and credit services to smallholders, tenant farmers, and rural entrepreneurs, thus alleviating poverty.