Does Low Population Density Restrain Microfinance Development? The Case of Niger

Niger is a West African country with a population of 12.4 million, 63% of which lives below the poverty line, and it has a population density of 9.8 people per square kilometer. This paper studies the impact of the distance between households and microfinance institutions (MFIs) on the performance of the microfinance sector in Niger.On the basis of data gathered from 163 MFI clients located in five out of the seven regions of Niger, the paper compares the following with the increase in distance:

• Client characteristics;
• Contractual forms;
• Monitoring activities;
• Outcomes.

Analyzing the findings, the paper argues that distance has three different effects on microfinance:

• The demand characteristics vary with distance;
• Higher transaction costs result in higher interest rates;
• Higher monitoring costs result in less effective loan supervision.

These effects make the MFIs adopt more stringent client screening procedures to ensure financial sustainability, and thus decrease the access to microfinance for the poorest of the poor.The paper concludes that while with increasing distance from the MFI, the borrowers face higher interest rates, and more constraints and delays in obtaining a loan, the marginal borrowers end up being excluded from the semi-formal credit market.