Rural Microfinance Crucial for Agriculture

Posted on 5 December 2007. Filed under: Microfinance |

The rural economy comprises of farm and non-farm activities. Agricultural activities dominate the rural economies of African countries. Demand for land has forced many African states to embark on massive land and agrarian reforms even though in some cases they have been controversial. The Zimbabwean land reform program is a classic example of one that attracted worldwide attention. South Africa, Kenya, Namibia and Zambia, to mention a few, embarked on land redistribution programs that were aimed at pushing the frontiers of poverty through availing land to the landless poor.

According to The World Bank (2006:11), agriculture accounts for 17 percent of the African region’s GDP, 40 percent of exports and a substantial share of employment. The bank also reports that a 1 percent increase in crop production in sub-Saharan Africa translates to a 0.7 percent reduction in the number of poor people; more than the 0.5 percent reduction in East and South Asia and seven times the 0.1 percent reduction in Latin America.

African governments need to develop facilities that will connect the rural poor to the markets by developing rural roads, electrification and communication. Lack of access to financial services and other opportunities such as education, raw materials, goods and services isolate the poor and expose them to emergencies, poor harvest, health problems and economic crisis. Rural areas are poorly integrated to the markets and the people end up hostages of intermediaries who sell them provisions, agricultural inputs and domestic utensils during the planting season who then buy all their output at duplicitous prices.

The rural poor are marginalised and left with limited or no access to financial services as micro-lenders fail to fill the void that is left by formal institutions. Financial intermediation becomes difficult and costly in the rural area because of spatial dispersion and associated high information and transaction costs; a strong link of economic activities with agricultural activities that are exposed to the vagaries of the climate, pests, diseases (such as swine fever) and prices; and seasonal production that is accompanied with sharp and opposite fluctuations demand for credit and deposit services.

Access to land is essential but not a panacea for effective rural development and poverty reduction. According to Alegre Porto in FAO’s Contribution to Good Policies and Practices in Agrarian Reform and Rural Development: A Brief Overview, land is more effective when beneficiaries of land reform have had prior experience in land and agricultural enterprise management and when they have the capacity to generate sustainable income. Rural infrastructure, improved technologies and a range of responsive rural services, including training, have proved essential to effective and lasting agrarian reform.

It is imperative to approach the question of land redistribution with sustainability in mind. Access to land needs follow-ups with a wide range of services so that the land beneficiaries realize long-lasting benefits. A holistic approach is required to achieve the full benefits of land redistribution. A full package of resources that should be given to the land beneficiaries so as to be empowered in their productive efforts include human Capital (knowledge, skills, labor); Natural Capital, land, Financial Capital ( savings and credit); Social Capital (local organizations and alliances) and Physical Capital ( rural infrastructure and equipment). There is need to develop human capital so that it is capacitated to mix the other factors of production hence the need for training. Financial resources should also be availed to work, as a lubricant to production. There is need for them to be financially liquid. Microfinance advocates for training the recipients of credit so that they know how to efficiently and effectively manage the resources

The factors that affect agrarian reform and rural development are highly complex, and inter-related. Importantly, we should underline that the rural poor are particularly vulnerable to economic and political shocks as well as natural risks and disasters, and while their livelihood strategies are designed to better prepare for and cope with such shocks, their limited access to the five forms of capital described above constrains their opportunities for rapid and effective response. Access to financial services is pivotal to all the other factors that may affect land holders as they help the poor expand their economic activities; incomes and assets and self-confidence.

Some writers argue that microfinance worsens poverty by making borrowers poorer. Once a poor person borrows money, the chances of repaying are slim so he/she cannot leave the cycle of poverty .However; the advent of microfinance refutes this by introducing loans that are followed with a range of services (integrated approach) that help in empowering the poor and building confidence in them. They also assist them in wealth accumulation thereby promoting sustainability. The factors that affect rural development such as population dynamics, shocks, technology, physical resources, power differences; policies and seasonality among others) need to be addressed holistically so as to achieve a long-lasting solution to poverty reduction especially in the rural areas.

By Stephen Mago
Mago is a PHD Student at University of Fort Hare, South Africa

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2 Responses to “Rural Microfinance Crucial for Agriculture”

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thanks for the research. Use of sustainable livelihoods framework (chambers) will go a long way in `further enhancing this paper.

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