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Local financing in rural areas

[ Summary ]


Chapter 2:
Current funding provision


2.1 Commercial banking sector


The commercial banking sector siphons off the lion’s share of the savings available in the market. However, its commercial logic leads it to seek those forms of investment that are the least costly, the most attractive in terms of returns and the least risky. More often than not, the needs of small-scale project promoters, especially from rural areas, come into direct conflict with these criteria.

Access to finance for small-scale project promoters, new businesses and social economy projects has therefore always been difficult. It is liable to become even more difficult in the future due to changes in the banking system and the fact that financial markets are becoming increasingly globalized. Indeed, a number of studies [4] have shown that the banks are engaged in two types of process which have serious consequences on local development: profit taking on speculative markets and a much more rigorous selection of their customers to exclude those that are least profitable.

So we see that the banks are tending increasingly to abandon some of their potential customers, as well as some of their traditional tasks of following up and supporting small-scale funding applications. They usually shun “minor” projects, “small” businessmen and socially responsible investments (environment, culture). This leaves young people, the unemployed and the social economy sector with no financial interlocutor.

Similarly, conventional banks are unwilling to take the risk of supporting business creation or innovation. They consider the management costs and risks to be too high. New business creators therefore often find themselves without an interlocutor who will help them to turn their ideas into reality.

A survey conducted in three French regions (Central West Brittany, the Brenne Nature Reserve and the northern part of the département of Haute-Saône) showed that, of those business firms with fewer than 50 employees:

  • more than 50% of the entrepreneurs questioned believed that the bank had no impact on their company;
  • 25% used a bank to finance their ongoing operations;
  • only 20% said that they felt supported by their financial interlocutor [5].

The study reveals that only a small proportion of small businesses use banks other than for overdraft facilities. If one also considers that, in predominantly rural areas, these are mainly one- person businesses (case of 78% of business firms in France’s Brenne regional nature reserve, as compared with the national average of 59%, for example), in actual fact such businesses have access to only the most expensive forms of credit. The study concludes that around 50% of business firms cover their needs by using bank overdrafts. This is therefore an extremely costly short-term financial strategy.

The lack of a financial interlocutor from the banking sector (except for operations that are profitable to the banks but costly to businesses, such as running bank overdrafts) discourages a portion of potential local investment.

Furthermore, the banking system behaves differently, depending on the area in which it operates. For instance, in northern Italy, with its prosperous and dynamic economy, the average interest rate was 4.5% in 1999, compared with 8% to 9% in the more marginal areas of the Mezzogiorno region. Such a discrepancy, which is blamed on the higher level of risk in southern Italy, discriminates against those areas with the greatest problems. Likewise, a study carried out in Germany between February 1998 and January 2000, entitled “Benchmarking in Micro Lending” [6], showed that no credit at all had been granted to small businesses from the former GDR over the period under analysis and that, in 67% of cases, the loan had been refused without giving any reasons.

This change in the role of banks is happening everywhere. It is the result of globalization, which intensifies competition between financial institutions. Nowadays, thanks mainly to the Internet, any bank is able to offer its services to any potential customer on the planet, in direct competition with local banks, whose survival is therefore automatically placed under threat. So, over the coming ten years, we are likely to see a complete upheaval of banking provision, which will in part be characterized by the disappearance of small local banks.

Even banking institutions that have traditionally been closer to rural project promoters, such as farm credit mutual funds, are increasingly adopting the financial profitability rationale in order to be able to cope with globalization.


[4] Granger Benoît and INAISE, “Banquiers du
futur: les nouveaux instruments financiers de l’économie
sociale du futur”, Editions Charles Léopold Meyer, 1998.

[5] France Initiative Réseau, “Les entreprises
implantées en zone rurale” a study carried out by the
French public opinion poll institute, SOFRES, April 1998.

[6] For further information about this
research project, consult the Internet site of the IFF
(Institut Fur Finanzdienstleistungen e.V: (texts in English and German
and databases in English, French, Italian and German).
The IFF is an independent research institute founded
in 1987 with the aim of helping to improve financial
products and services. Its research priorities are:
consumer lending and indebtedness, welfare finance,
small business finance, access to financial services,
financial documentation and real estate finance.

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