Hivos International

Why Financing Rural Entrepreneurship

The Green Entrepreneurship programme considers rural entrepreneurs to be key agents in solving rural poverty, climate change, environmental degradation and food insecurity. This is especially true of small scale producers (M/F), poor women and small- and medium enterprises in rural areas. One of the main obstacles these people face is limited access to financial services to start up and grow successfully their businesses or income-generating activities. 

So called ‘missing middle’ SMEs and  POs organised in businesses in particular need larger and cheaper loans for longer terms than micro finance provides, and smaller amounts than the corporative sector lends. Financing rural entrepreneurship is specifically geared to this missing middle. Financing individual small-scale producers and poor rural women through micro finance is dealt with by the Building MFIs focal area of the Green Entrepreneurship programme.

The micro finance experience has shown that fairness toward the small-scale entrepreneurs can become an issue as private sector involvement increases. This is also an issue in value chain finance, where the private sector is plays mostly a leading role - especially in the case of embedded financial services (provided by chain actors themselves). Hivos endorses the policy statement of the Action Group Rural Outreach and Innovation European Microfinance Platform (eMFP) of 29 November 2010 concerning value chain finance. The statement refers to fairness and of division of roles, indicating that eventually, financial services should be provided by professional institutions rather than chain actors.

Another issue that plagues micro finance, in particular credit, is lack of proof of impact in terms of poverty alleviation and economic empowerment of women. We promote a gender approach in value chains and strongly believe that financing rural entrepreneurship can have greater economic and socio-environmental impact than micro finance. Financing rural POs and SMEs addresses a number of limitations of the micro finance approach. First of all, micro finance or credit is often the only support small scale entrepreneurs receive, whereas complex issues such as poverty cannot be remedied by such a one-dimensional approach.  What financing rural entrepreneurship does is to combine financing with other coordinated interventions such as support to POs and small-scale producers linked with SMEs.  

Additionally, focusing on the missing middle addresses some important shortcomings of micro finance raised by Milford Bateman & Ha-Joon Chang in Microfinance and the Illusion of Development: from Hubris to Nemesis in Thirty Years:

  • MF ignores the crucial role of scale economies: micro-finance comes with micro-enterprise. Undermines productivity.
  • MF ignores the ‘fallacy of composition’: not everybody can sell tomatoes/ redistribution of poverty.
  • MF helps to de-industrialise and infantilise the local economy. SMEs lose out.
  • MF fails to connect with the rest of the enterprise sector.
  • MF ignores the crucial importance of solidarity and local community ownership and control.