available in most rural circumstances. In Brief 6 Ajai Nair describes leasing as an alternative to credit, which can help ease the provision of credit for investments in movable assets in rural areas. The brief describes the benefits of leasing to the client and the provider and identifies lessons on how to manage and support financial leasing in rural areas. Finally, a key issue in financial service delivery is how to


effectively increase repayment rates. In Brief 7 Yanyan Liu and Klaus Deininger discuss this issue in the context of self-help groups (SHGs) in India. Their analysis of the factors affecting repayment performance among low-income SHGs shows that effective application of rules pertaining to loan terms is more important than group characteristics in improving repayment performance.


Using modern communication technology


Recent advances in communication technology affect rural banking in two key ways. First, by facilitating electronic payment systems and branchless banking, this technology can significantly slash transaction costs for both service providers and consumers. Second, using portable smart technology to establish identification and monitor clients can significantly alleviate information asymmetries and help improve repayment rates.


In Brief 8 Susie Lonie describes how the cell phone–based payment service M-PESA now serves more than 9 million clients throughout Kenya, enabling them to remit money, make bill and loan payments, make cell phone–based payroll payments, and use banking services. In Brief 9 Xavier Giné describes the results of an experiment


to assess the impact of using biometric technology to monitor repayment performance of individuals in rural Malawi. This experiment showed that repayment rates increased by 40 percent for groups with a high default risk, and the benefits of improved repayment outweighed the cost of implementing the new technology.


Managing risk at the household and farm level


The management of risk is the key issue for financial institutions that finance agriculture, as well as for rural populations in general. In Brief 10 Mark D. Wenner analyzes various approaches to managing risk in financing agriculture. Index-based insurance schemes are one approach that has been implemented on a pilot basis in several countries. Such schemes use an easily observable index that is not subject to tampering. The index is correlated with the underlying risk and used to make decisions on insurance payouts, thus eliminating the cost of verification as well as incentives to misrepresent losses. In Brief 11 Jerry Skees and Benjamin Collier describe an ongoing pilot project in Peru that insures firms (such as microfinance institutions or firms in the value chain) serving smallholder households. The insurance pays out


based on extreme El Niño events that create catastrophic flooding resulting in significant consequential losses and extra costs for a wide range of stakeholders in northern Peru. Microinsurance has been developed as a risk management tool


only recently. In addition to being more expensive to administer than savings and loan services, microinsurance schemes are plagued by more severe levels of adverse selection and moral hazard, which makes them challenging to provide on a sustainable, full-cost- recovery basis. Brief 12 by Martina Wiedmaier-Pfister and Brigitte Klein surveys key experiences in providing insurance in rural areas, including important issues related to regulating microinsurance.


Bundling financial and nonfinancial services


In addition to financial constraints, small farmers in developing countries also face market constraints in acquiring needed inputs (such as fertilizer, seeds, and extension services). Returns to financial services are thus highly conditional on access to other nonfinancial services. Brief 13 by Vijay Mahajan and K. Vasumathi describes how BASIX in India provides services such as soil testing and health monitoring of livestock, along with credit, to farmers in a way that maximizes returns to credit services. Brief 14 by Jonathan Campaigne and Tom Rausch describes


a similar approach used by the DrumNet project in Kenya. In contrast to BASIX, however, the DrumNet project uses information technology to link key actors along the supply chain to farmers.


The way forward


This set of briefs seeks to initiate discussions among stakeholders by disseminating information on a selection of innovative, on- the-ground initiatives designed to improve financial access for poor small farmers. All of these initiatives hold promise, but they also face challenges, and in the end some may not be suitable for a massive scale-up or for use in all country settings. Yet such initiatives demonstrate that it may be possible to eventually provide financing for agriculture on a sustainable basis at a reasonable cost. Many of these initiatives are based on the premise that there is a supportive policy environment that allows innovation to flourish. The gravest risks to sustainable financing for agriculture often come not from inherent business risks or the inability of financial institutions to design profitable financial products for the rural population, but rather from misguided government interventions such as subsidized interest rates and lack of or non-enforcement of appropriate rules and regulations. Conversely, an enabling environment and legal framework, enforcement of regulations, and a supportive rural infrastructure would eventually lead to lower but sustainable interest rates by reducing transaction costs and risks and increasing competition. All this would contribute immensely to making sustainable access to finance a reality. n


Renate Kloeppinger-Todd (rkloeppingertodd@worldbank.org) is rural finance adviser in the Agriculture and Rural Development Department of the World Bank.Manohar Sharma (msharma5@worldbank.org) is senior poverty specialist in the Poverty Reduction and Economic Management Unit, East Asia Region of the World Bank.


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