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Local financing in rural areas

[ Summary ]


Chapter 1:
Local financing - needs and issues


1.3 Possible ways to bridge the gap between
funding supply and demand


In general, there are three ways to bridge the gap between funding supply and demand and to make it easier to match the two:

  • take demand-side measures to match demand more closely with supply requirements;
  • take supply-side measures to match supply more closely with demand requirements;
  • create liaison structures to perform certain functions and to act as the “missing link” between supply and demand.

a) Take demand-side measures to match demand more closely with supply requirements

    In most cases, demand-side funding measures consist of assisting project promoters to develop their project, to present it more persuasively and to provide the best possible guarantees for securing finance.

    What the Tarn des Montagnes LEADER group (Midi-Pyrénées, France) refers to in its strategy as “trawling for projects” consists of organizing intensive local coordination activities over a short period of about three months to identify all potential initiatives and projects and provide them with overall coherence and, most importantly, to offer each one customized technical support. Every project in this list, regardless of type or size, is considered. Its feasibility is verified and, if the results are conclusive, a support process is immediately launched.

b) Take supply-side measures to match supply more closely with demand requirements

    Funding provision is often characterized by a bid to earn maximum returns on investment. Therefore, anyone depositing their savings with a financial institution expects an optimum yield from such savings, more often than not without asking exactly how the funds will be invested. This can sometimes lead to an incongruous situation. Cases have been known where workers’ savings have been used to finance projects to modernize factories, which has led to mass redundancies among those very workers. Savers share some of the responsibility in that they are increasingly turning from placing their savings in deposit accounts to share investment, either directly, or indirectly via investment funds or (in some countries) pension funds.

    By introducing ethical criteria into the issue of funding provision it becomes possible to adapt supply more closely to demand since it takes into account the specific characteristics of certain funding applications. This includes those that are the most “atypical” and are not the most effective in terms of short-term profitability, but that have a particularly important role to play in long-term development: local development, revitalisation of rural areas, social integration and environmental protection.

    Ethical criteria can be introduced at the level of:

    • existing structures, such as banks and investment trusts, which provide savers with products that have been designed according to ethical criteria (“ethical ratings”) selected for specific products; or

    • directly at the level of savers, who decide individually or collectively to invest their savings in local investment funds, mutual saving funds, etc.

c) Create structures to bridge the gap

    Some functions act as real “missing links” between funding supply and demand and can be carried out by special organizations. These may include:

    • information and communication functions (e.g. informing savers about local investment possibilities);

    • setting up funding provision that is complementary to existing provision, to play a leverage role in funding projects where there is insufficient trust or receptiveness between fund providers and project promoters. LEADER has often intervened at this level, acting as an instrument to release funding that would never have been made available without outside support.

        In Portugal, for example, the budgets of the district councils are quite a lot larger than those of the “freguesias”, the lower micro-local administrative level, even though it is often precisely at freguesia level, which is closer to the local community, that ideas for projects emerge. To overcome a degree of reluctance on the part of the district councils to finance projects initiated by the freguesias, certain LEADER groups have co-financed the projects concerned, which has made it easier for these projects to secure the financial commitment of the district councils.

    • Setting up complementary funding provision to the existing provision in order to help project promoters who do not have access to enough capital of their own to invest;

    • creating systems to enable funding applicants to meet suppliers’ requirements, which otherwise they would be unable to meet. This applies particularly to guarantee funds which stand as partial surety for project promoters in guaranteeing bank loans;

    • subsidies to bridge the cost gap, such as subsidies to pay for administering small loans, in order to induce banks to take a stake in small projects;

    • schemes to group loan applicants together in order to secure better collective terms.


    Reasons for gaps between funding supply and demand Possible ways to bridge the gap
    Matching demand with supply requirements Matching supply with demand requirements Matching supply with demand
    a) Human-relations issues
    The two sides do not know one another

    Information and coordination structures
    Lack of trust Support for setting up the project and the funding application Introduction of ethical objectives Complementary provision with a leverage effect (seed funds)
    b) Economic issues
    Zero or insufficient financial participation from the beneficiary

    Establishment of local investment funds, mutual saving funds Subsidies and seed funds
    Insufficient guarantees from the project promoter

    Guarantee funds
    Management/follow-up costs too high

    • Partial payment of management costs
    • Grouping together loan applicants
    Better returns on investment outside the area
    Introduction of ethical objectives for an area


    Finally, this analysis raises a question about financing. How is it possible to secure sources of finance where the demand for returns is not inflated by current market trends? The only possible solution is to introduce a strong ethical requirement from savers and intermediation structures.

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