Rural finance encompasses the range of financial services offered and used in rural areas by people of all income levels. It includes agricultural finance, which is dedicated to financing agricultural related activities such as input supply, production, distribution, wholesale, processing and marketing, and microfinance which provides financial services for poor and low income people by offering smaller loans and savings services, while accepting a wider variety of assets as collateral. The following diagram illustrates the overlapping relationships between these different terms.

A number of factors continue to thwart the development of vibrant financial markets in the rural areas of most countries. The higher transaction costs associated with dispersed populations and inadequate infrastructure, along with the particular needs and higher risk factors inherent in agriculture result in an under-provision of financial services in rural areas. Further, where services are available, products are often designed without consideration for the needs and capacities of rural households and agricultural producers.

The inability of households and enterprises to access capital on competitive terms to undertake profitable investments, or take advantage of market opportunities, means that incomes and growth are lower than they need be. Without market instruments to insure against risk, rural households and enterprises may even retreat from profitable projects for which they have adequate liquidity. The absence of competitive savings instruments and other financial services in rural areas leads to less productive forms of savings that cut further into households' scarce liquidity and dampen local growth prospects.

Expansion of rural financial services can create a win-win scenario that will promote growth while also helping reduce poverty. Given the high proportion of poor populations that live in rural areas, the growing income inequality between urban and rural markets, and concerns for food security and population vulnerability in rural communities, many development agencies are returning their attention to rural financial deepening as part of a strategy to stimulate rural private sector development.

The FAO Rural Finance Group is dedicated to promoting improvement in rural financial services in developing and transition countries. Details of their work and publications can be found here. A much greater range of information and resources relating to rural finance can be found in the Rural Finance Learning Centre which is managed by the FAO Rural Finance specialists.