Financing Agriculture and Rural Areas in Sub-Saharan Africa: Progress, Challenges and the Way Forward
In spite of investments and policy reforms, Sub-Saharan African countries lag in supplying financial services for agriculture and rural areas. New products, delivery channels, and partnerships, along with greater attention to savings, provide fresh optimism that this situation will be corrected. This paper examines several examples, with special attention to developments with savings groups and financial innovations with mobile phones and information and communication technologies (ICT). The telecom revolution and other innovations suggest that their use may leapfrog some difficult transportation and communication problems that drive up transaction costs and risks, and restrict financial inclusion for the poor.
The purpose of this paper is to summarise innovations, along with their strengths and limitations, used to improve access to sustainable financial services for agriculture and rural areas in sub-Saharan Africa, with a special focus on smallholders. Section II reviews the impediments to the progress of developing rural financial markets, followed by a section outlining the evolution in paradigm shifts in analysing such markets. Section III summarises the role and constraints of the major categories of financial services providers beginning with the most formal institutions, banks, and ending with the least formal, savings and loan groups. The use of financial linkages and agents, the explosive growth of mobile phones for financial services and the emergence of investment mechanisms concludes the section. Section IV reviews strategies to reduce and manage risks including insurance, partial credit guarantees, warehouse receipts systems and, finally, the emergence of credit scoring to reduce the information costs of credit screening. Section V summarises the status of financial infrastructure investments made to benefit the entire financial system in collateral registries and credit bureaus. Section VI discusses the impediments for term finance and why the lack of land for collateral is one of the explanations. The final section outlines the way forward with an emphasis on savings groups and mobile finance.