Understanding rural finance -its link to agriculture
A majority of the African population resides in rural areas which has limited or no access to traditional banking and financial institutions. They depend on agriculture for their livelihood. Only an estimated 5% of the domestic resources are being allocated to the agriculture sector. The challenge of rural finance arises from the lack of infrastructure and institutions in the rural area to the high risk profile of the agricultural sector. This is what has led African governments to bring about and implement financial inclusion policies aiming at bringing respite to these sections
Insurance sector too is at a relatively low in African countries with only 7 countries exceeding a 2% penetration rate. And unlike other countries, here it is the non-life insurance that is driving the market. The insurance products that are most popular are micro insurance, agriculture insurance, SME promotional products etc. This is mainly due to the rural nature of the majority of the population
Rural finances, cover a wide range of financial services like providing loans, money transfer facilities, savings accounts, loans etc. A majority of these rural financial services will fall into the agricultural finance category. The kind of services sought by this population is mostly loans for their agriculture and livestock supply, production and distribution related activities.
Most traditional banking institutions would think twice about engaging with the purely agriculture based rural population. Farmers are mostly dependent on the nature and seasonal rains etc. for their yield. Depending on changing seasons, pest menace or other diseases, farmers may or may not yield a desired crop at a specific time. Also, it may take more time for farmers to pay back their loans than the rest of the sectors.