Introduction:

                Concepts for the sustainable provision of micro finance already exist in urban areas, but the majority of the rural population in developing and transition countries has only very limited access to financial services. Yet most people live in rural areas.

Problem:

Ø  As a rule, commercial banks either do not provide financial services to rural areas at all, or do not provide sufficient services. Compared to urban areas, the supply of other basic services is also largely non existent.

Challenges:

One of the greatest challenges of the next few years will therefore be to develop technologies for the rural areas of these regions which will make it possible to provide sustainable, customized financial services. For rural populations, access to financial services is an indispensable prerequisite for competitive participation in an increasingly globalized world economy and also a way of avoiding any further slide into poverty

Urban-rural disparities:

Ø  While sustainable micro finance technologies have been successfully developed for urban and semi-urban areas

Ø  There is generally no sustainable supply of financial services to the rural areas of developing and transition countries.

Ø  The reasons include high transaction costs due to low population density and high risk levels based on climatic and co variant risks which is not present in urban areas.

Ø  For financial institutions ,in rural area this results on the one hand in higher costs and on the other hand in lower per capital savings activities and loan demand.

Ø  Experience shows, however, that rural populations in particular can benefit from suitable financial services provided by means of stronger self help strategies.

Ø  Technical and institutional innovations are particularly necessary. Rural areas represent one of the frontiers of the micro finance approach.

Ø  These challenges recognized be  Donor and implementing organizations, such as GTZ, KfW ,the Swiss development agency DEZA and the World Bank

Ø  Rural societies are generally far better organized than urban ones.

Ø  For example, a person’s creditworthiness is known at village level. If a micro finance institution assigns responsibility for loan allocation and repayment to the village community, it can tap this information without having to gather. it at great expense.

Poor people are creditworthy …

Millions of rural microfinance customers provide living proof every day that poor people are creditworthy and are also willing to pay the full price for high-quality financial services.

It can represented be two findings:-

                An example from northern Mali illustrates how a loan customer uses a loan to pursue three different strategies: she uses part of the loan as working capital for the production of cakes. By purchasing a sheep, she makes the other part an investment. The investment, in turn, takes the function of insurance. As she is a client of a microfinance institution that does not offer insurance products, she can only obtain insurance indirectly through her own investments.

And need a diverse portfolio of financial services, just like the rich:

Ø  Microfinance research of the last few years shows that the poor want financial services similar to those demanded by the better-off in society. These services mix short and long-term transactions with loans, insurance, savings and transfers. The difficulty in providing these services sustainably lies not in the type of product, but in the low volumes involved. The low income from interest is at odds with the high administrative costs.

Demand for finance of a household in Tajikistan:

Needs that can be planned for and are linked with a person’s life cycle would be covered by savings wherever appropriate, trustworthy financial institutions exist. Events that cannot be planned for require informal insurance mechanisms, since formal insurance systems cannot be accessed. Investments are financed via savings and loan mechanisms. This segment, comprising investment in income-generating activities, is the focus for almost all microfinance institutions: it is what they base their loans on. Often, the closeness of the link between household and business is underestimated. At the household level, the available resources are channelled to where they are most urgently needed, even if this is not directly productive (for example to treat a sick child). Studies have shown that only in exceptional cases are loans used solely for the purpose that they were given. In the case studied in Tajikistan, temporary emigration played a role in all three demand sectors. Working abroad could be caused by hunger (distress migration), but could also serve to accumulate investment capital or to prepare for a marriage. Migration movements can play similar roles in Africa and Eastern Europe. Source: Own research on behalf of GTZ.

Conclusion:

Ø  Modified operational structures that can be implemented with less-qualified local personnel allow profitability even for small scale operations.

Ø  Strong capitalization involving local shareholders increases the pressure to make repayments, and increases the capacity to absorb crises stemming from the wider setting.

Microfinance is integrated into the banking system by means of refinancing through local banks...