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Financial policies in Mesoamerica should focus on rural development

Study on Public policies and rural financial services in Mesoamerica concluded

Finance and rural development policies in Mesoamerican countries should be integrated; currently there are gaps in public policies that should promote rural financial services to aid the communities in these areas to overcome poverty.

This was the primary conclusion of the “Study on Public policies and rural financial services in Mesoamerica,” which presents and systematizes the most promising rural financial services (RFS) initiatives in each country, and identifies the main obstacles and opportunities for public policy in this area.

The aforementioned report was written as part of a research project by the Rural Development Consult of the Free University of Amsterdam (CDR-ULA), under RUTA’s supervision and the Rural Finance Services Support Program (SERFIRURAL). The study encompassed five country studies in Guatemala, Honduras, Mexico, Nicaragua and El Salvador

Important for poverty reduction

The critical point is that the lack of integration of financial policies with rural development policies results in a limited impact on poverty reduction in rural areas.  According to the study’s authors, the expansion of rural financial services (RFS) is an important instrument in poverty reduction  and the promotion of rural development.

Direct access to financial services affects productivity, generation of capital, income and food security in poor rural areas.  Therefore, in this regard, it is essential to ask what public policies are doing, or what can they do to guarantee access to rural financial services for the rural poor, and thus have a greater impact on poverty reduction.

The study warns that currently there are too many gaps in public policy implementation aimed at strengthening rural financial markets in low income population segments in an effective and sustainable manner.  With the exception of Mexico, the lack of support instruments means that service providers must assume the risks and costs of the services, limiting low income populations’ access to RFS

Limited bank presence in rural areas

The banking sector is playing a limited—yet potentially significant—role in the transformation of the agricultural and rural sectors, with the exceptions of PROCREDIT in El Salvador and Nicaragua, or BANRURAL in Guatemala. Among the reasons for limited penetration in rural areas are high administrative costs to enter those areas and high risk associated with agricultural activities.

Nevertheless, the document shows evidence of a variety of institutions involved in providing rural financial services, and acknowledges the importance of the non-traditional financial sector (cooperatives, NGOs, rural self-management organizations) as the primary providers of financial services to the rural poor. Among these, the role of rural self-management organizations (Rural Banks, Community Banks) stands out, which because of their proximity to the target population play an important role in determining access to financial services for the least benefited rural populations.

However, the role of the non-traditional financial sector is limited by the existence of regulatory framework counterproductive to the development of RFS. The study indicates that in general, the existing regulatory framework is focused on credit, limiting the concept of savings and imposing limits on interest rates, thereby obstructing the development of microfinance in rural areas.

In order to reach the marginalized rural population, it is necessary for the regulatory framework to promote, among other things, savings and interest earnings, to unify cash reserve system regulations and to develop flexible guarantee systems

 

Recommendations

Among the study’s recommendations regarding public policy and RFS in Mesoamerica are:

  • The need for public policy development actors to work under a new, joint vision of RFS to integrate financial and rural development policies.
  • The development of public policies oriented toward mitigating risks of agricultural activities through crop insurance or business systems using contract agriculture, among others.
  • The integration of rural financial markets through the creation of mechanisms (such as technology transfer or funding sources) that promote complementariness of formal or semi-formal financial systems and rural production organizations.
The systematization of successful experiences in the expansion of financial services to rural populations, such as the “Tu Crédito” program in El Salvador.

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