Transaction Cost Reduction Models for Microfinance Institutions
This article discusses several area specific collection models that MFIs can adopt in their operational strategies to reduce transaction costs. MFIs in developing countries have to face high transaction costs to supply financial services to rural areas. Often, these costs cannot be adequately covered through interest charges because usury laws or traditions prevent them from charging high rates of interest. Therefore, MFIs tend to reduce the quality and quantity of their services, which increases transaction costs for clients. The article suggests several area specific collection models that financial institutions should adopt after considering risks involved and the optimum utilization of resources. Such models include:
- Direct collection model;
- Direct repayment model;
- Banking model;
- Collection account model;
- Collection link model;
- Federation partnership model;
- Smart cards model;
- Post office model.
Transaction costs aid MFIs in increasing profits and achieving sustainability. Area specific collection approaches help them improve their business outreach and reduce transaction costs. MFIs can achieve the double bottom line objective of social and economic development of rural households by offering microfinance services at lower interest rates.
