Paper
Role of Microfinance Institutions in Rural Development
Linking formal financial markets and grassroots organizations through microfinance
7 pages
This paper evaluates MFI successes and failures around the world, and incorporates lessons leant in a model microfinance institutional mechanism for India.
Successful microfinance operations demonstrate that the poor repay their loans and are willing to pay higher interest rates if they can access credit. The poor also save, and hence, microfinance should provide them savings facilities. Attaining financial viability and sustainability is, however, a major institutional challenge. Microfinance should:
- Mobilize deposits in order to expand outreach;
- Be grounded on market principles;
- Contribute to solving the problem of inadequate housing and urban services;
- Provide multi-purpose loans for income generation, housing improvement and consumption support;
- Conduct research on demand for finance and savings behavior of borrowers to determine the mix of multipurpose loans;
- Enhance creditworthiness of the poor and enable them to qualify for long-term credit from the formal sector;
- Build financial discipline among borrowers and educate them about repayment requirements.
Eventually, it would be ideal to enhance the creditworthiness of the poor to enable them to access credit from the formal sector. MFIs can contribute towards this by building financial discipline and educating borrowers.
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