This publication reviews experiences with agricultural credit programmes in the last decades and the shift from directed credit towards a new approach based on rural financial system development. It sets out the special market environment of the agricultural sector in developing countries and the unique features of agricultural finance. These particular conditions still require special government attention but in a different manner from that followed under the directed credit approach.

This publication sets out to clarify the process of policy formulation for agricultural and rural finance, and emphasises the mechanisms involved. It is addressed to those responsible for formulating, managing and tending the rural financial system, namely, policy makers, donors and managers of rural financial institutions, financial experts/consultants and project designers. It highlights some of the key issues that should be addressed in the policy making process and provides a diagnostic methodology which can be used as an aid in the evaluation of the comprehensiveness of a given policy-making system at national level. Case study examples are presented throughout the document to highlight the importance of some key issues when formulating an agricultural finance policy.

The objective of this study is to identify unique features of the agricultural sector and the rural economy that present challenges for expanding the frontier of formal finance, how these affect the provision of sustainable financial services and the key elements of a strategy for successful agricultural lending. Although no simple blueprint exists for successful rural financial institutions serving agriculture, some recent interesting experiences derived from case studies and the new microfinance developments suggest "better practices" that are presented as part of the strategy.

This document describes the different sources of funds which financial institutions use to make loans: government budget funds, donor funds, central bank credit lines, interbank loans, savings, debt and money market instruments and equity. It gives an overview of the current liability composition of rural financial institutions world wide and recent trends and shifts, together with a qualitative analysis of the advantages and disadvantages of each source of funds from the financial institution's point of view. Based on this analysis recommendations are made regarding the most appropriate combination of funds to secure financial sustainability and independence whilst fulfilling the general goal of providing the necessary inputs for agricultural investments.

Generally, financial institutions are not allowed to offer deposit services unless they are regulated and supervised by a supervisory body. For any small depositors, the safety of their deposits is a priority. In rural areas agricultural lending brings specific risks to rural financial institutions and they need to be closely watched by any regulatory body. Small rural depositors cannot monitor the management of financial institutions where they deposit their funds themselves. This publication deals with experiences in the field of regulation and recommends specific regulatory and supervisory measures appropriate to agricultural finance.

The policy area examined in this book is that of education and training in financial management skills. The case is made that if farming families are more familiar with the requirements of formal financial institutions, can supply the right kind of information to them, have the right attitude concerning contractual agreements and can monitor money as it is acquired and spent by the family, then they become more attractive potential clients of the formal financial sector. This would enable more financial institutions to expand their activities in rural areas in a sustainable manner. Alternative ways of promoting these skills are examined - in schools, literacy classes, community meetings, farmer groups or through training courses and individual counselling from agricultural extension workers and the staff of financial institutions.

This volume focuses on the ways in which rural financial institutions can provide term finance successfully by adjusting financing products and technologies to the specific cash flow and risk profiles of rural clients and farm investments. It draws on empirical research on rural term finance providers in various parts of the world. Some cross-cutting issues are also discussed, related to the economic, legal, institutional and policy environments that determine the supply and effective demand for term finance. These include improving the legal and institutional environment for secured lending, reducing asset liability mismatches, and managing systemic yield and price risks. Key areas are highlighted for government and donor support to financial institutions, clients, policy reforms and other complementary measures.