Seasonality of Rural Finance
Simultaneity of borrowing, withdrawal of savings, and loan defaults due to the pronounced seasonality of agriculture often leads to investment failure of rural financial institutions. Lack of borrowing leads to lack of in-come- and consumption-smoo...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/957611488291742296/Seasonality-of-rural-finance http://hdl.handle.net/10986/26184 |
| Summary: | Simultaneity of borrowing, withdrawal of
savings, and loan defaults due to the pronounced seasonality
of agriculture often leads to investment failure of rural
financial institutions. Lack of borrowing leads to lack of
in-come- and consumption-smoothing, and in turn, causes
inefficient resource allocation by rural households.
Financial institutions that are active in rural areas take
different measures to address the covariate risks in
intermediation. For example, microfinance institutions have
sought various measures such as supporting non-farm
activities to diversify income, introducing seasonal loans,
and bringing flexibility in loan repayments to reduce
non-payments in lean seasons. This paper examines whether
the financial inclusion policies of micro-finance
institutions have successfully helped reduce the adverse
effects of covariate risks. Analysis of house-hold and
program level data from Bangladesh suggests that despite the
innovative measures taken by the MFIs to cope with the
covariate risks, seasonality of income still affects
seasonality of borrowing and investment decisions of both
the households and MFIs beyond and above what is caused
normally by agricultural seasonality. Innovation is needed
to promote, among other things, sectoral diversification of
financial inter-mediation and to avert the extreme
seasonality of rural income. Rural labor markets should be
diversified enough to address the seasonality of income and
consumption. Public policies guiding rural financial
inter-mediation must reflect such realities of rural economies. |
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