Microfinance institutions have conquered the urban areas that had been underserved by commercial banks, but rural areas are another story.
The challenges in rural areas are obvious: high vulnerability to natural disasters, lack of infrastructure and scarce technology. On top of that, considering the difficulty of getting supplies and the fact that higher administrative and transaction costs produce lower profits, it is not difficult to understand why investors favor urban microfinance businesses.
Creating incentives to meet the demand for rural credit is the main challenge, experts in microfinance agree. To do that, and to expand business opportunities in the rural sector, requires taking rural culture and ways of doing things into account, a group of experts said recently at IDB headquarters.
There have been a few success stories in this arena. In Bolivia, for instance, microfinance institutions customized ATMs to serve the Aymara people.
Achieving success in the development of rural financial services takes more than the mere participation of bankers and economists. It also requires input from anthropologists, sociologists, agronomists and representatives of civil society on how to best serve the client in a rural environment.
Who better to ask than an expert in the field to find out the best way to evaluate risks in rural areas? Pablo Coloma asked himself that question, as chief financial advisor to the Agricultural Development Institute in Chile, concluding that he could put together a better risk evaluation if he invited agronomists to participate in the exercise. He suggested giving them a more relevant role as experts in rural credit, too.
The public sector also plays an essential role in promoting rural areas as attractive locations for enterprising microfinance institutions. Public institutions could develop tools to support rural businesses and prepare market studies that show where opportunities exist based on client needs, the experts point out. Agro-insurance is one industry that has made positive inroads in rural areas, protecting clients against the risks inherent in rural agricultural businesses.
As long as rural conditions continue to make it difficult for the private sector to enter rural markets, the public sector must continue meeting the needs of rural businesses, while still trying to make rural areas more attractive to private investors. The mission of development banks is to educate microfinance lenders and provide temporary assistance to facilitate their development, the experts underscore.
Microfinance institutions do exist in rural areas, but just existing is not enough, the experts point out. They need to satisfy the demand. Although the experts acknowledge that there have not been many improvements in rural areas, they say that it is now time to stop focusing on urban microfinance and start emphasizing rural microfinance.