Expanding Commercial Microfinance in Rural Areas: Constraints and Opportunities
This paper analyzes constraints and opportunities to expand the provision of microfinance in less densely populated rural areas. The authors define commercial microfinance as sustainable delivery of services in a regulated policy environment. However, they state that there are challenges that need to be addressed:
- Unsound macro environment such as high inflation economy;
- Interest rate caps, subsidized credit and loan waivers;
- Inadequate legal structures;
- Limited institutional capacities of microfinance institutions (MFIs).
Moreover, the author finds that rural operations present another set of challenges:
- High transaction costs;
- Limited infrastructure;
- Seasonality of agriculture, which causes high levels of demand at one time and inability to repay until after harvest;
- Covariant and systematic risks in agriculture and related enterprises;
- Price and market risks for agriculture produce;
- Low agricultural productivity in many countries.
The authors highlight practical approaches to the successful expansion of rural microfinance by commercially-oriented MFIs. The paper concludes with a discussion of roles for governments and donors in expanding commercial microfinance in rural areas:
- Providing an enabling environment;
- Improving institutional capacity;
- Supporting innovations and linkages.
This Case Study was presented at "Paving the Way Forward for Rural Finance," an international conference on best practices.
