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Local financing in rural areas

[ Summary ]


Chapter 1:
Local financing - needs and issues


1.2 Gap between funding supply and demand


The issue of financing arises where, on the one hand, there are promoters of ideas or projects without sufficient funds to carry them out and, on the other hand, holders of financial resources (savers, banks, public administrations, etc.) whose role includes supporting the development of such ideas with the means at their disposal. Financing therefore consists of creating a form of partnership between these two types of player to allow each to benefit: project promoters (funding applicants) are able to implement their ideas and owners of financial resources (suppliers) are able to derive better returns from their funds.

Areas where suppliers make financial resources freely available to project promoters in an opportune manner are described as having a high level of “financial agility [2]”. By contrast, in areas where such links are difficult for one reason or another, there is poor financial agility. Indeed, there is a multitude of reasons why those seeking finance are unable to forge links with those supplying it, e.g.:

  • they do not know one other;

  • they may know one other but do not trust each other enough and may even be at loggerheads;

  • project promoters do not provide sufficient guarantees, especially in the case of small-scale projects;

  • their objectives are not compatible;

  • fund holders find better returns on their money elsewhere;

  • the cost of managing small funding applications is too high;

  • the financing techniques, which have generally shrunk as a result of regulatory constraints, are unsuitable and too formal for the target audience;

  • conventional financing structures (banks) have shed the personnel with the necessary know-how to finance small local projects and replaced them with young employees trained in standardized credit techniques (screening).

There may also be more subjective reasons, such as a fear of losing a degree of power or seeing a potential competitor set up in business, etc.

So there is always a certain discrepancy between funding supply and demand, the reasons for which can be found on both sides:

  • on the demand side, an inability to put forward a project of a large enough size or with sufficient guarantees;

  • on the supply side, a fear of failure, using short-term profitability as the only criterion, a lack of interest in the area, etc.

Such problems of linking funding supply and demand are more acute in rural areas due to the fact that on the demand side, we are generally speaking of:

  • small-scale project promoters;
  • scattered project promoters (geographical dispersion, small and little-known sectors of activity);
  • risky projects (greater uncertainty about the project’s viability).

On the funding supply side, the conditions in rural areas are also less advantageous:

  • the trend towards bank mergers that group together geographical areas has resulted in decision-making centres being located in the towns and hence becoming increasingly remote from both the local and rural economies;

  • the vast networks of rural branches are generally still useful for capturing the large mass of rural savings, but are not equipped (particularly in personnel terms) to finance projects: the rate of recycling rural/local savings is therefore extremely low (often less than 25%).

Faced with these limitations, rural promoters often find themselves isolated and experience difficulties in financing their projects. The problem is even more acute for certain groups such as the young, the unemployed, etc.

So, in rural as well as urban areas, the gap between funding supply and demand is becoming a factor of exclusion for certain sections of the population. This is why access to credit may be perceived as a social right, as asserted by the “Community Regeneration” project [3], which is supported by the British government in Wales. The fight against exclusion is therefore intricately linked with access to credit. In areas where there is a consistent lack of access to credit for certain social groups, social cohesion will inevitably also be lacking.

As an obstacle to the emergence of projects, the gap between funding supply and demand has repercussions on all aspects of rural development. Access to credit is therefore an issue that is closely linked with social integration and the sustainable development of rural areas.

Asserting this right of access to credit forms part of a dual dynamic: the existence or creation of national or European support frameworks and the application of approaches appropriate to the local level. This dual context raises questions concerning the role of the different levels of responsibility and the different players involved (public sector, private financial sector and the community) in building a financing strategy to promote the sustainable development of rural areas.


[2] The term “financial agility” was coined
by a number of Portuguese LAGs during the
self-evaluation activities conducted by the LEADER
National Coordination Unit.

[3] For further information concerning this project, consult:

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