Sustainable Rural Finance: Prospects, Challenges and Implications

This paper examines the role of institutional sustainability, and the challenges in expanding financial services to rural areas in developing countries, focusing particularly on Ethiopia.

Microcredit interest rates play a major role in determining institutional sustainability. While there is consensus on the components that should go into the interest rate computation, the level under each component is fixed by each actor. This gives rise to various applications, often causing controversy. The paper recommends that:

• Borrowers should not have to pay high interest rates to cover a program's inefficiencies;
• Microcredit programs must control their costs, provide efficient services and become self-sufficient;
• Certification for microfinance service providers needs a new approach;
• Mechanisms to check that the MFI is working at the desirable level of efficiency should be in place.

Finally, the government can play a key role in sustainable rural finance by monitoring market distortions, developing rural infrastructure, expanding business development services and supporting innovation in financial services.