NERC/04/INF/6 March 2004 T WENTY - SEVENTH FAO R EGIONAL C ONFERENCE FOR THE N EAR E AST Doha, Qatar, 13 - 17 March 2004 The Role of Micro-Finance in Sustainable Agricultural Development CONTENTS Paragraphs I. BACKGROUND 1-4 II. ROLE, CURRENT LIMITATIONS AND CHALLENGES OF MICROFINANCE 5-9 III. MICROFINANCE IN THE NEAR EAST REGION 10-13 IV. RECOMMENDATIONS FOR THE DEVELOPMENT OF RURAL MICROFINANCE IN THE NEAR EAST REGION 14-22 For reasons of economy, this document is produced in a limited number of copies. Delegates and observers are kindly requested to bring it to the meetings and to refrain from asking for additional copies, unless strictly indispensable. E
I. BACKGROUND 1. Although the Near East region is witnessing the highest urbanization growth in the world, the rural population still predominates in non-oil producing countries in the region, averaging 60 percent of the total population. In addition, the agriculture sector employs 60 to 80 percent of the labour force on average in the region and constitutes the biggest share of Gross National Product (GNP) (Mustafa, 1999). A significant portion of the agricultural output is produced by small and medium producers, which constitute between 50 to 80 percent of the farmers. Given the size and importance of this sector, agricultural investments remain a valid policy objective in the Near East. In particular, the development of sustainable financial institutions that offer both working capital and investment loans at competitive rates and provide safe and secure deposit facilities for farmers remains critical for achieving continued economic growth in the region. However, the Near East, like many other regions in the world, is haunted by a past of underperforming public agricultural development banks, with heavy government intervention and a limited outreach to small farmer clients. 2. In general, small farmers and rural enterprises have limited access to formal financial services. Appropriate financial products and viable and sustainable financial institutions to deliver them are scarce. This situation results from: high transaction costs associated with small loan amounts, highly segmented financial markets, and the provision of credit services to risky agricultural economic activities. Other impediments that restrict the supply of agricultural finance include: inadequate access of farmers to profitable market outlets for their farm produce and a lack of conventional bank collateral by small scale farmers. This situation is accentuated in particular by the high, covariant risks in agriculture without adequate mechanisms to manage and minimize these risks. Macroeconomic distortions and political intrusions into rural financial markets reduce the viability, credibility and sustainability of formal public financial institutions. Inadequate and non-enforceable legal systems are not conducive to the development of lending and other financial services that serve large proportions of the rural population. Adoption of supply driven credit rather than demand based financial services is a restricting factor.
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