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“Four C’s” for Expanding Rural Microfinance

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The next post in a new series in preparation for the XIV Inter-American Forum on Microenterprise (Foromic) in Costa Rica from 10-12 October. CGAP and the MIF are joining forces to argue about the key challenges in microfinance and distill the game-changing solutions for greater financial inclusion and stronger micro and small enterprises in Latin America and the Caribbean. These posts will also be featured on MIF’s Microfinance Blog in Spanish.

The road is difficult for institutions that decide to provide credit, savings, and other financial services in rural areas. The smaller the individual transaction or the greater the distance to the client, the greater the challenges in providing financial services. Problems are further compounded when we add the factor of agriculture. If we want to advance rural microfinance in Latin America, institutions should focus on the following “Four C’s”:

Commitment (social): Faced with saturated urban markets and a highly competitive environment, microfinance institutions may be tempted to enter rural areas. Or they might be motivated by politics or the desire to improve their image. But initiating such a move for these reasons can lead to an artificial and transitory commitment that does nobody any good. No microfinance institution should enter rural areas unless it can identify a long-term business opportunity that fits its business plan. More important, no institution should take this step unless they have a true vocation for serving the rural population.

Comprehension (knowledge of the clients): One cannot enter the rural market blindly, particularly when dealing with agriculture. The rural reality is radically different from one place to another, even within a single region. For this reason, it is critical to have a deep and comprehensive knowledge of the rural economy; this basic requirement is often overlooked by financial institutions. It is not easy to understand the strategies that rural people use to cope with their changing environment. Even for institutions with considerable rural experience, it is difficult to design financial products that meet the needs of rural people in terms of how they generate income, handle their expenses, their expected and unexpected risks, their relations within families, within communities, etc.

Capacity (organizational): Once institutions have a thorough knowledge of the rural market, financial institutions have to consider whether they are capable of operating there; if their procedures and systems can offer the required products; and most important, if they have the staff who can carry out the proposed expansion. Rural loan officers, with their local knowledge and understanding of the rural culture, will ultimately be responsible for building a large portfolio of operations, each of which generating a small profit.

Courage: I don’t know of any institution that achieved success in rural financing that was not criticized when it started out, or that faced no difficulties before it achieved its first results. Rural financial markets pose challenges that can be daunting to the boldest institutions. For those that wish to combine courage with the first three C’s that I am proposing, it is an uphill and sometimes rocky road for achieving what is comparatively easy elsewhere. Only with time and perseverance can an institution take the correct steps needed to succeed in such an initiative.

You cannot ask everything of microfinance institutions. This is doubly true in rural areas. Institutions that enter rural areas on their own are less likely to succeed than those that form partnerships with technical assistance and educational organizations, suppliers of inputs, etc.

We are all learning, and although much remains to be done, the work of microfinance in the region seems to be paying off. At least, this is what is suggested by the reports of 124 microfinance institutions submitted to The Mix Market (a well-known source of global data) in late 2010 that indicate a total rural loan portfolio in Latin America and the Caribbean of US$2.7 billion for over 2.6 million transactions. Some of these institutions will participate in Foromic this year in Costa Rica, in the session on rural microfinance (Forito on Rural Microfinance) to exchange experiences and propose strategies for expanding and increasing the provision of financial services to rural populations.

We’ll be there to listen and work with you!

Comments

09 September 2012 Submitted by Dr V.Rengarajan (not verified)

Dear Omar
For the process of expanding rural finance the 4 ‘C’s as posted are useful inputs for the financial institution in the supply side. . But another set of 4 ‘C’ s as mentioned below are also necessary in the process of ensuring the productivity and sustained outcome of the expanded rural finance in the demand side thereby collectively all 8 ‘C’ s would facilitate for the ultimate purpose of expansion of rural finance served sustainably be it in Latin America or elsewhere in the world for that matter.
5.Credit planning-
for identifying the potential schemes for credit deployment and estimate the demand for rural credit based on the available potential in the given area
6.Capability of the rural client.
Since the capability for income generation out of given rural credit vary among the rural clients, the product designing need to be matched appropriately with their capability probably with the component of training and skill up gradation
7.Coordination
Coordination with other development partners (state) in the rural area for integrating non financial support physical assets like road, transport, marketing etc with the credit services for ensuring a sustainable impact on rural client household level.
8. Consultation with the rural client
The consultation with the rural client would facilitate design matching product and services to their needs and also ensure people’s participation in the rural development process thro credit and in impact evaluation as well.

If found useful these additional ‘C’s also may be incorporated in new series in preparation for the XIV inter-American forum on Micro enterprise in Costa Rica FROM Oct 10-12
Dr Rengarajan

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