Rural+Bank

Rural Bank
Like any business, farmers and other rural entrepreneurs require capital, and may need credit in order to fully realize their production potential. However, in traditional agriculture the only sources of credit might be a family member or a moneylender that charges very high interest rates (often above 100%). Farmers only go to these moneylenders in emergencies (for medical expenses), not to invest in fertilizer or start a small business. Urban commercial banks are absent because they lack the information about reliability of individuals in rural areas, and the rural setting makes the fixed cost of operating in these areas prohibitive for an urban bank.

In several countries, such as Bangladesh and Indonesia, formal credit institutions have creatively pioneered ways to operate in rural areas. Pioneered by NGOs such as [|BRAC] (Bangladesh Rural Advancement Committee) and [|Grameen Bank], microfinancing is a group-lending mechanism in which impoverished recipients (usually women) are given small loans of a few hundred dollars as working capital for microbusiness activities. Such women were long considered unbankable, simply not creditworthy enough to bear the transaction cost to receive loans. Group lending changed the repayment dynamics: default rates are extremely low, and BRAC and Grameen figured out how to keep the other transaction costs to a minimum as well. The result was rural women began engaging in small-scale commercial activities--food processing and trade--within viallges and on the roads between villages and cities. In Indonesia, the Bank Rakyat Indonesia (BRI) began providing full banking services to the poor in over 3,000 villages by charging market interest rates that were at market rate or slightly above, but far lower than the rates charged by the moneylenders. In both cases -- microfinancing institutions and traditional urban banks working in rural areas -- the increased access to credit meant families could diversify incomes and move away from completely dependence on agriculture.

In the MV Sim, a family can choose to take a loan from the rural bank to increase the family fund or invest in capital for a small business. The maximum amount that can be borrowed depends on how much capital the person has in small business (the small business capital acts as collateral). After you borrow, you begin to pay installments on every turn (with total payback scheduled to happen in 4 years – 8 turns). If you don’t have enough money to pay your installment, then some of your business capital is taken away. The interest rate offered varies from turn to turn, depending on market conditions. However, once a loan is taken out, the interest rate at the time of the loan is fixed during the lifetime of the loan. Only take out one loan may be taken out at a time.

Note that the currency used in the MV Sim is the CFA franc, the official currency of 12 countries in west and central Africa. $1 is approximately 450 CFA. All prices in the MV Sim are realistic approximations of prices in Sub-Saharan Africa.

For more information:

Robinson, Marguerite. [|"Rural Financial Intermediation: Lessons from Indonesia."] Development Discussion Paper No. 434. Harvard Institute for International Development. October 1992.