Financial services to the rural population

08 Jul, 2022 - 00:07 0 Views
Financial services to the rural population

eBusiness Weekly

Dr Keen Mhlanga

The economy is made up of many different segments called sectors. These sectors are comprised of different businesses that provide goods and services to consumers.

The companies that are grouped together in a sector provide a similar product or service.

For instance, companies that offer agricultural services make up the agricultural sector. Corporations that provide mobile or cellular telephone services are part of the telecommunications sector, hence the importance of the financial services sector to a country’s entire population. However, the supply is under rated in the developing nations especially in rural areas whereby only the population in urban areas benefits financial services to a greater extent.

The financial services sector provides financial services to people and corporations. This segment of the economy is made up of a variety of financial firms including banks, investment houses, lenders, finance companies, real estate brokers, and insurance companies.

As noted above, the financial services industry is probably the most important sector of the economy, leading the world in terms of earnings and equity market capitalisation. Large conglomerates dominate this sector, but it also includes a diverse range of smaller companies. The financial services sector is the primary driver of a nation’s economy. It provides the free flow of capital and liquidity in the marketplace.

When the sector is strong, the economy grows, and companies in this industry are better able to manage risk. The strength of the financial services sector is also important to the prosperity of a country’s population. When the sector and economy are strong, consumers generally earn more. This boosts their confidence and purchasing power. When they need access to credit for large purchases, they turn to the financial services sector to borrow. If the financial services sector fails, though, it can drag a country’s economy down. This can lead to a recession.

When the financial system starts to break down, the economy starts to suffer. Capital begins to dry up as lenders tighten the reins on lending. Unemployment rises, and wages may even drop, leading consumers to stop spending. In order to compensate, central banks lower interest rates to try to boost economic growth. This is primarily what happened during the financial crisis that led to the Great Recession.

The development of rural finance has been characterised by the channelling of cheap credit to a small proportion of farming households and the very limited provision of markets that mobilise savings. This direction of development supports the belief that rural households do not have the propensity to save and therefore they cannot invest. Because the formal sector does not provide adequate financial services to the rural sector, the informal sector has risen to fill in the gap.

In the process of Zimbabwe’s economic development, the two financial sectors formal and informal, have grown side by side. Their main aim has been to increase productivity in the economic sub-sectors. It is often argued that the size of the informal financial sector is a reflection of lack of development of the formal financial sector.

In rural Zimbabwe, informal finance is predominant particularly in the area of savings mobilisation by mainly women’s groups. Savings clubs constitute the single largest movement mobilising rural finance.
These clubs come under a number of umbrella organizations such as the Self-Help Development Foundation (SDF), the Association of Women’s Clubs (AWC), Input Suppliers such- as Agricura, Windmill, and various churches. With respect to informal lending this activity is not as widespread as savings mobilisation. Pure money lending is not as common in rural areas as it is in urban areas. A large part of the informal lending in rural areas takes place between relatives or friends and it is often interest-free.

In Africa, rural areas suffer from financial exclusion. This is vindicated by very little or non-existence of rural banking facilities. For sub-Saharan Africa, about 70 percent of the population lives in rural areas and the majority are poor. About 90 percent of the population in developing economies lack access to financial services from formal financial institutions.

The situation is succinctly articulated by The Herald, which reports that in Zimbabwe, rural areas are hardly serviced by formal banks hence people rely on informal financial institutions.

Commercial banks continue to shun rural areas, prefer-ring urban areas, and this constrains efforts to bring the poor and marginalised into the main-stream economy.

Apparently, traditional banks shun establishing branches in rural areas because of high information, transaction and monitoring cost, inaccessibility due to poor infrastructure, dispersed and intermittent demand for financial services, seasonality deposits and lack of collateral.

With this backdrop, rural underdevelopment remains a painful challenge in the Zimbabwean economy. The rural areas remain excluded from participating in the mainstream of the economy because of their inability to mobilise cheap financial resources makes it difficult for them to improve their livelihood. The Zimbabwean rural economy is mainly agricultural driven and the majority of people in these areas are peasant farmers.

Rural communities in Zimbabwe have in-creasing demand for financial intermediation which can be supplied through rural banking. Rural communities demand the same banking services that are supplied to their urban counterparts.

They need to save (through bank deposits), borrow, do money transfers, insurance, get banking advice, and many other banking services. This calls for financial management, which is essential for rural development. Since the rural financial sector in Zimbabwe is not developed, the rural residents have no access to financial advice that will enhance their financial management capabilities.

Financial inclusion is important for rural development. Yet, financial inclusion is low in Zimbabwe. FinMark in 2011 found out that financial exclusion it at 40 percent in Zimbabwe and this percentage excludes those who are informally served (41 percent). Those who are financially excluded use neither formal nor in-formal financial services to manage their finances.

The other opportunity for rural banking is that the present government of Zimbabwe is rural-development oriented. This political focus gives reason for the Reserve Bank of Zimbabwe (RBZ) to be involved.

The role of the Reserve Bank in the initial stages of the rural bank would be to; provide suitable banking premises, office furniture and equipment, stationery, appoint board directors, recruit and train staff. The funds could be availed in the form of “redeemable preference shares”.

The major challenge that the rural bank system in Zimbabwe is likely to face today is that of liquidity of the RBZ. The bank is facing liquidity problems, which came as a result of the2000 to 2009 economic recession in the country.

The bank could link up with rural development financial institutions like the African Rural Agricultural Credit Association (AFRACA), which is an association of banks and financial institutions that offer financial support to rural development. In order to increase the viability of rural banks, the RBZ would need to relax its statutory reserve for the rural banks until they have reached financial independence, which come with increased viability.

Financial intermediation in the rural areas will help to lubricate rural economic activities for the stimulation of rural development. In Zimbabwe, the rural economy faces a dearth of financial resources, and yet they are vital for economic growth and development. In a nutshell, the development of rural banks will provide access to finance by the rural people, not as “easy money” but money that is generated through their savings and investments.

Dr Keen Mhlanga is the executive chairman of Finking Financial Advisory. He can be contacted on [email protected] Com or +263719516766.

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