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CHAPTER 5 Innovative Microfinance: Potential for Serving Rural Markets Sustainably

Richard L. Meyer[1]

Providing sustainable financial services for rural areas and agriculture in developing countries has proven immensely challenging. Billions have been spent to subsidize programs and policies designed to develop financial institutions to serve this neglected market segment. However many of the sector's decision makers and analysts continue to be dissatisfied with the progress. One fairly bright spot has been the increasing penetration of microfinance institutions (MFIs)[2] into rural areas with products and services designed to meet the needs of rural populations and especially the needs of seasonal agricultural production. MFIs face the same challenges of high costs and risks that all financial institutions confront in serving this market, but many innovations are being tested that may eventually yield solutions more attractive for market-oriented sustainable financial institutions.

This chapter summarizes how some MFIs supply finance to rural areas and agriculture. Emphasis is placed on lending even though major advances are occurring in microinsurance, savings mobilization, and payment and remittance services. There is no data base that reports MFI agricultural loans or financial activities in rural areas so this chapter focuses on selected MFIs for which data and studies are available. This chapter also discusses the adjustments MFIs must make as they move away from serving mostly urban and peri-urban clients. Observations about the role of donors and development finance institutions (DFIs) in overcoming barriers conclude the book chapter.

1 Agricultural and Rural Microfinance

1.1 Definitions

The terminology generally follows that of the International Fund for Agricultural Development (IFAD, 2010). The financial market includes all financial services for all purposes from all sources in both urban and rural areas. Rural generally is defined as geographic areas (villages, towns, small cities) with fewer inhabitants and lower population densities than in larger cities and towns. Agricultural finance refers to financial services used throughout the agricultural sector for farming and farm-related activities including input supply, processing, wholesaling, and marketing. Agricultural credit is normally provided in cash but some in-kind loans are provided for seed, fertilizer, and other production inputs. Microfinance (MF) involves small-size transactions and products specifically designed for low-income households and small scale businesses, often concentrated in urban or densely populated rural areas, but increasingly penetrating more rural locations. Agricultural microfinance, therefore, refers to small-size transactions for poor farm households and farm-related businesses while rural microfinance encompasses both agricultural and non-agricultural firms and households in rural areas.

  • [1] Professor Emeritus at The Ohio State University.
  • [2] The early innovators were frequently NGOs but now many banks and cooperatives offer microfinance services.
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