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Many areas of world are still lacking proper services which put them in a perilous condition and financial services are one of them. Financial services are the type of economic services that is provided by different types of finance companies like banking, insurance, accounting, stock market,
Government sponsor enterprises etc. which includes providing proper funding to different areas and communities of the globe. Financial services are very important for a proper functioning of a country but many areas are not yet able to use them properly. This essay will mainly focus on the access of financial services among different types of rural and remote areas and communities of the world.Financial services in rural areas nowadays are concerned with various type of services that does not only include agriculture related lending but also lending to farm households that bare in non-agriculture production and consumption purposes, rural savings deposit services, loan made to non-farm rural firms and some other financial services such as insurance.
Today as well the majority of poor people live in rural areas and yet most of these rural areas lack access to these financial services that they need and in areas where they are accessible, they are relatively costly or rigid. Some of financial institutions seeking to work in rural areas faces lots of problems such as low education level, poor infrastructure, low standard of livings and many more. Besides, the main source of finance that is short term working capital loans with often expected repayments are in negative relation to seasonal or long-term agricultural activities. The ongoing presentation by a few donars of the money related framework approach in miniaturized scale and rustic back which stresses ideal strategy condition and foundation building has enhanced the general viability of country fund madiations. Be that as it may, various difficulties remain particularly in agrarian fund. Micro-finance means financial services (savings, credit, payment transfers, insurance) that are for poor and low-income people. Rural finance refers to financial services that are offered and used in rural areas by people of all income levels.
Financial services refer to services provided by the finance industry.The back business incorporates a wide scope of associations that arrangement with the administration of cash. Among these associations are banks, Visa organizations, insurance agencies, buyer back organizations, stock financiers, venture assets and some legislature supported undertakings. The organizations giving these money related administrations, ponder the requirements of their clients in detail before choosing their budgetary system, giving due respect to costs, liquidity and development contemplations. Money related administrations firms persistently stay in contact with their clients, so they can outline items which can take into account the particular needs of their clients. The suppliers of budgetary administrations always do advertise reviews, so they can offer new items much in front of need and looming enactment. More current advancements are being utilized to present inventive, client amicable items and administrations which unmistakably demonstrate that the grouping of the suppliers of monetary administrations is on producing firm/client particular administrations. In an exceedingly focused 3 worldwide condition mark picture is exceptionally essential. Except if the money related establishments giving budgetary items and administrations have great picture, getting a charge out of the certainty of their customers, they may not be fruitful. Along these lines establishments need to center around the quality and ingenuity of their administrations to develop their believability. Additionally, creation of money related administrations and supply of these administrations must be corresponding. Both these capacities i.e. creation of new and inventive money related administrations and providing of these administrations are to be performed all the while.
Financial services are a very vital part of the financial system. Financial services serve the needs of individuals and organizations through a network of financial institutions, financial markets and financial instruments. Financial services play a key role in growth and development of any country. This is done by managing various financial instruments in such a way that money is funneled from those that don’t need it right away to those that need it and probably want to use it for some productive work. Tremendous growth of the countries that have highly efficient financial systems in place is a testimony in itself as to how highly efficient financial markets lead to strong overall growth of the economy. Following are considered to be the primary functions of financial services (Caprio, 2001):
1. Facilitating transactions (exchange of goods and services) in the economy.
2. Activating funds (for which the outlets would somehow or another be substantially more
3. Designating capital assets (quite to back gainful venture).
4. Observing administrators (with the goal that the assets designated will be spent as imagined).
5. Changing danger (lessening it through total and empowering it to be conveyed by those all the more ready to manage it).
1.3 Financial services in rural areas
The availability of quality financial services in rural areas is extremely important for the growth of the economy as this will enable the large number of rural households to fund the growth of their livelihoods. The growth of the economy is dependent on the growth of the rural market in the country. Therefore greater financial inclusion in these segments is imperative.
Rural finance is about providing financial services – secure savings, credit, money transfer and insurance – in rural areas. Indeed, financial services can play an important role in rural development. Savings and insurance schemes assist the rural population in reducing vulnerability to risks, planning more reliably for the future 4 and saving for upcoming investments, as well as smoothing out irregular income flows and covering unexpected expenses. The latter is particularly important in rural areas where income depends on agricultural cycles. Loans for investments and working capital are crucial elements that enable rural entrepreneurs to make investments, seize economic opportunities, and purchase agricultural inputs and working capital. Short term consumption or emergency loans can help households to avoid difficult situations that might have forced them to sell an asset. However, loans are not always favourable: some poor borrowers experience difficulties in repaying their debts, due either to circumstances beyond their control (e.g. sickness, theft, natural disasters) or to a lack of knowledge and wrong investment strategies. Money transfer services make it possible for people who leave rural areas to work in cities or abroad to send home their remittances safely and at reasonable costs. In addition to fostering rural development, rural finance is increasingly used as an incentive to promote sustainable use of natural resources, use of alternative energies, and environmentally sound behaviour. In recent years, several banks and microfinance institutions have attempted to achieve not only financial and social, but also environmental sustainability, which has been dubbed the “triple bottom line”.
Despite the significant demand for financial services in rural areas, institutions offering financial services – such as banks, credit unions, microfinance institutions (MFI) or insurance companies – are typically reluctant to serve rural areas. As a result, the majority of the developing world’s rural population does not have access to the formal financial system. Confronted with this lack of access, households, farmers and small entrepreneurs rely on informal ways of accessing financial services. Entrepreneurs usually rely on family savings or borrow money from friends to make small investments, and in emergency situations people tend to borrow from acquaintances. Such loans are usually repaid without interest. Also, people typically rely on moneylenders to obtain loans. Moneylenders often ask for usurious interest rates and sometimes try to recover the loans by violent means. On the other hand, moneylenders can provide loans rapidly in an emergency, and they do not ask for collateral. Community self-help schemes such as self-help groups (SHG), rotating savings and credit associations (ROSCAs), community-based savings and credit mechanisms are useful instruments to encourage savings, provide small-scale insurance and avoid debt at exorbitant interest rates.
Formal institutions can offer a broader range of financial products. Formal services such as microfinance cannot replace loans from friends and family, but they do complement them and enable the rural population to access a wider range of 5 services. Moreover, formal financial institutions belong to the economic infrastructure of a country or region and can thus help to foster economic development.
1.5 Challenges in rural areas regarding financial services
Rural households and entrepreneurs still face a number of obstacles that make it difficult to access financial services. Following are a broad array of challenges faced by service users as well as financial institutions (Schlaufer, 2008):
High transaction costs: Operating in Rural Areas comes at a very high cost for financial service providers. Lack of infrastructure, information technology and communication play a major role in restricting the institutions from venturing into this sector. Adding the remoteness of these areas and very thinly spread clientele to the list of the problems makes it simply not worthwhile for financial institutions to make investments in rural areas. To avail these services, the consumers of these services have to travel long distances and that too usually by foot, can cost them an entire working day. Because of the remoteness of the areas, the financial service providers face high charges on account of ensuring security and maintaining liquidity. These high costs are passed on the customers resulting in higher rates of interests and thereby making the entire proposition unviable, for both, the institution and the customer.
Higher risks: Incomes in rural households are volatile as they mostly depend on seasonal agricultural production which are highly risk prone to weather fluctuations, diseases or pests. All this results in higher credit risk for borrowers as well as rural financial institutions. Increasingly, lot of variation has been observed in prices of rural commodities. Historically, rural households have depended on only one or two sources of income thereby increasing the risk of credit default. This has been changing of late, but still the change is not very substantial. Financial institutions usually have no means of securing their credits in case of default as many households either entirely lack collateral or do not have a legal title to their house or land. Defaulting clients run high risks as well as financial institutions will typically impose punitive interest rates for delayed payments and might even confiscate assets of defaulting clients.
Higher rates of illiteracy: Illiteracy rates are very high in developing countries like India,Pakistan, Bangladesh and even more so in rural areas. People who are not well read face an extra challenge in accessing financial services: it is difficult for them to analyse credit risks and the profitability of a loan or savings scheme, to provide all documents and information (such as a business plan) required to apply for a loan, 6 and to understand conditions and contracts. Some institutions fail to communicate interest rates and commissions in a transparent manner, and small prints in contracts can contain additional costs for borrowers. On the other hand, financial institutions those want to expand into rural areas experience difficulties in finding, hiring and keeping a well trained staff that is willing to work in a rural region. Lack of experienced staff, in turn, leads to poor institutional capacity among rural financial institutions.
Information for this essay was sourced from various secondary sources, all listed in the Reference List. Data from publications by the Australian Bureau of Statistics also proved valuable. This essay is not a comprehensive review of the available literature, but provides a broad overview of the topic.
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