Rural Microfinance between Clients and Financial Markets

This paper deals with microfinance in less-favored rural areas characterized by agrarian economies and low population density.

A large proportion of the rural population have low and irregular incomes due to a relative neglect of physical infrastructure, low levels of education and health services, and dependence on unpredictable agricultural production. The provision of financial services under these circumstances requires MFIs to pay specific attention to their organizational structure and mode of operation, and the design of financial products. High transportation and transactions costs and co-variant risk are serious obstacles to establishing financial services in such areas. The paper:

• Discusses position of microfinance in the process of rural transformation in developing countries;
• Analyzes conditions generally associated with the rural environment, and assesses their implications for provision of financial services;
• Examines abilities, limitations and desires of rural households to engage in relationships with MFIs;
• Identifies challenges associated with establishing effective rural MFIs.

The paper examines the future of microfinance, and stresses the need for MFIs to broaden their objectives and focus on financial stability.