What Makes Rural Finance Institutions Successful?

Providing affordable credit to the rural population has long been a prime com-ponent of development strategy. Governments and donors have sponsored and supported supply-led rural finance institutions both to improve growth and eq-uity and to neutralize or mitigate urban-biased macroeconomic policies. But be-cause of high risks, heavy transaction costs, and mounting loan losses, many of the programs have drained state resources to little purpose, reaching only a small part of the rural population and making little progress toward self-sustainability. There are, however, a few success stories. This article reviews the policies, modes of operation, incentives, and financial performance of four publicly spon-sored programs in Asia that are widely perceived to be successful, to find out what economic, social, and institutional factors contributed to their success. Two objectives are paramount for a rural finance institution (RFI) tobe successful: financial self-sustainability and substantial outreach tothe target rural population. These criteria were used to assess the per-formance of four RFIs generally considered successful: the Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand, the Badan Kredit Kecama-tan (BKK) and the Bank Rakyat Indonesia Unit Desa (BUD) in Indonesia, and