ABSTRACT
In the 1960s and 1970s national policymakers charged many rural banks with the provision of cheap credit to small farmers, small fishermen, or broadly speaking, rural households with small-scale enterprises. The performance of these institutions and the programs, projects and schemes they supported, however, remained below expectations. A new thinking about rural finance and its role in development, based on the concept of the Rural Financial Market (RFM), clearly demonstrated the shortcomings of the cheap credit policy. It enabled a more balanced understanding of the roles of rural banks, informal intermediaries and their (potential) clients in the supply of and demand for financial services (Adams 1983; Donald 1976; Von Pischke 1981). The new thinking also resulted in a growing recognition that governments should refrain from direct participation in banking and concentrate on policies that establish and maintain confidence in financial institutions. Such a new role of government in finance is a pre-condition for the provision of sustainable financial services by banks. Of course, this is not the only issue. Various studies have explored other factors that strongly affect the provision of rural banking services (Binswanger and Rozenzweig 1986; Schmidt and Kropp 1987; Von Pischke 1991).
