Rural Finance: Let’s Crack the Nut!

Access to financial services is an important piece of the complex puzzle of rural development. The benefits of financial services on households – asset building, consumption smoothing, and risk management – are even more heightened in the rural context. However, rural areas, marked by dispersed populations and limited infrastructure, pose enormous challenges to financial service providers trying to reach different segments of the rural population, and it remains an underserved market.

A recent conference in Washington, D.C., attempted to crack the nut of rural finance. I was particularly inspired by the opening remarks of Chandula Abeywickrama from the Hatton Nation Bank (HNB) of Sri Lanka. HNB is a well established commercial bank that was forced to embark on rural and agricultural finance in the mid-1970s when the government restricted private commercial banks to open branches in urban cities. The bank’s approach to rural and agricultural finance provides lessons that can no doubt be useful to all types of financial service providers around the world:

Clear vision. Seventy percent of the Sri Lankan population lives in rural areas and is directly and indirectly involved in agriculture. By the late 80s, HNB saw a great potential with a large underserved rural market, and developed a strategy accordingly. They downscaled part of their regular operations by establishing a dedicated division for microfinance and rural banking to provide not only a wide range of financial products and services, but also extension services (e.g. technical assistance, marketing arrangements). In addition, they went rural with a long term vision, understanding the risks but also acknowledging the long-term rewards.

Delivery channels. To support its new rural and agricultural finance strategy, HNB invested in new delivery channels to reach rural customers more effectively. New channels included full-fledged customer centers, microfinance units, ATMs, and mobile vehicles. But the bank did not stop with the physical and technological infrastructure; it also invested in developing a large network of field officers.

Right people, right place. The bank heavily invested in its human resources by hiring qualified people that not only understood finance, but also had expertise in agriculture. Even the board includes champions of agriculture finance. HNB created a network of 250 ‘barefoot bankers’ who work in the villages and usually come from the community. They act as field officers and also mentor, guide, and provide technical assistance to clients.

Partnerships. HNB established strong relationships with the Central Bank, other government entities, and funders. They worked together to identify opportunities for expansion of rural and agricultural development. In addition, HNB initiated corporate partnerships to make the link between the private agribusiness sector and smallholder farmers. Private agribusiness firms work with farmers to provide them with inputs, technical assistance, assist in agro technologies, and implement buy-back agreements.

Risk management. HNB is taking risk management seriously, and put several systems in place to mitigate them. At the field level, having the ‘barefoot bankers’ close to the clients and bringing technical expertise and guidance helped reduce risks. Farmers are encouraged and guided to become commercially viable. In addition, the arrangements between HNB and its corporate partners are designed so that risks are shared or transferred. This resulted in mitigated production risks and market risks.

In short, to crack the nut and have successful rural finance, it is important to take into consideration the unique features of rural markets, customer demand and business requirements, and financial market realities on the ground. What is needed to get rural finance right is quite similar to what is needed to get microfinance more generally right—but perhaps with an extra dose of everything as the context is often more challenging. Major investments in institutional capacity, for example, are required as capacity across the board (financial instutions, end-client, and government institutions) tends to be weaker in rural areas. And when it comes to agricultural finance specifically, addressing the nonfinancial constraints (quality of inputs, marketing, etc.), is key as is collaboration with the government and private sector.