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Finances play a central role in economic development. Well developed financial systems enable financial intermediation to take place, such that one person’s savings can be invested productively by another person without the need for a direct relationship between those two people. Such systems of intermediation ensure that opportunities for productive investment are realised, jobs are created, and economies can grow.
The importance of well functioning financial systems for economic development and hence poverty alleviation has long been recognised, but since the 1980s with the emergence of microcredit, and later microfinance, as a development intervention, providing financial services as a tool for poverty alleviation has taken centre stage. Understanding how financial service provision can help alleviate poverty and designing policy and planning interventions related to financial service provision has become a key part of the work of Government departments, international development agencies, and non-governmental organisations (NGOs) working on poverty reduction.
Most of the world’s poorest people live in rural areas, a situation which is not expected to change until at least 2015, despite rapid urbanisation. This means that working to alleviate poverty in rural areas is central to alleviating poverty more generally. This module focuses on rural finance. It aims to provide a sound understanding of the role that financial intermediation plays in rural development, and the policies and interventions that can promote effective financial intermediation leading to reduced poverty.
This module will be useful for students and researchers in academia and for those who work in development – in government departments, international development agencies, NGOs or private businesses – who are involved in the design of policy or interventions to address problems of rural poverty in developing countries. As a result of studying this course, students will be equipped to understand the role that finance plays in the wider process of development and poverty reduction, and to design and assess policies and interventions related to financial service provision that leads to reduced poverty.
Objectives and learning outcomes of the course
The specific aims of the module are:
- to examine the finances of the rural poor and the role financial access plays in development and poverty alleviation in rural areas
- to explore experiences with providing rural finance to date
- to present practical methods for assessing and designing rural finance interventions.
By the end of this module students should be able to:
- explain how the rural poor manage their finances
- explain how access to financial services can help the rural poor to improve and secure their livelihoods
- describe, compare and critically appraise different types of intervention that have attempted to provide rural finance in the past and today
- identify needs and develop appropriate policies and interventions for the provision of rural finance depending on the particular needs identified
Scope and syllabus
The module is broadly structured in two parts. The first five units provide students with a broad conceptual framework for thinking about rural finance, including a set of tools for understanding financial accounts. The second five units review and assess policies and interventions for building financial systems and providing appropriate financial services to the poor.
The first unit provides a general introduction to why finance matters for economic development, and rural development and poverty alleviation specifically. Unit 2 presents basic accounting methods that can be used to produce simple accounts from easy to collect basic data about poor households and small businesses. Unit 3 takes a close look at the livelihoods of the rural poor, farmers and non-farmers, to better understand how they can benefit from greater access to better financial services. Unit 4 examines how such people manage their money in the absence of formal financial institutions, with a view to learning from, building on, and adding to existing systems in designing interventions to improve the livelihoods of poor people. Unit 5 provides an overview of the history and current state of rural finance as a development intervention, describing and assessing various efforts that have been made to channel financial services to the rural poor since the 1960s.
Unit 6 outlines the range of financial products useful for the rural poor, including savings, credit, insurance and remittance services, and considers the possibilities for and challenges to providing these services. Unit 7 moves onto product delivery, considering effective ways of making the products that poor people need accessible, particularly in remote rural areas. Unit 8 looks at the different institutions involved in rural finance, from NGOs to specialised microfinance institutions to state and commercial banks, considering issues of commercialisation, governance, and regulation and supervision. Unit 9 focuses in on the issue of subsidies. It presents tools for working out levels of subsidy, outlines possibilities for increasing income and so reducing subsidy, and discusses ‘smart’ subsidies that shift markets in positive directions rather than creating negative distortions. The module ends with unit 10, which deals with impact assessment. After outlining different impact assessment methodologies, it presents a fairly critical assessment of the impact of rural finance to date, recognising that while progress has been made, there is still a long way to go in meeting the financial service needs of the rural poor, with some of the innovations discussed in the unit providing important possible directions for the future.