Innovations as Response to Failures in Rural Financial Markets

The paper suggests that financial institutions need to develop innovations to meet the challenges of microfinance and rural finance markets. It states that innovations could be bringing in new products and methodologies into the market, as well as refinements to existing practices that are created in response to market inefficiencies and changing demands of the target market.

The paper also notes that innovations by financial institutions help to reach the un-serviced poor households, and also provide more and better products and services that contribute to increasing profitability. Innovations are categorized into:

• Innovations in the financial system, which refer to changes in the structure of the financial sector particularly in the legal and regulatory framework;
• Innovation in the institutional system, which deal with the changes in the structure, organization, and legal form of the institution itself;
• Innovation in the process, which refers to the introduction of new business processes leading to increased efficiency and market expansion; and
• Innovations in the product portfolio, which refers to the introduction of new or modified products or services tailored to the needs of the borrowers.