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This highlight is based on ACCION InSight #11, available for download in English and Spanish, free-of-charge at http://www.accion.org/insight.
With rural poverty accounting for 63 percent of poverty worldwide, the importance of making microfinance services available beyond city limits is clear. ACCION's objectives in rural microfinance are to extend the frontier of sustainable microfinance beyond urban areas by overcoming cost barriers, mitigating risk, and exploring technological and methodological innovations.
Facing stiff competition and market saturation in some urban markets, urban-based microfinance institutions (MFIs) are increasingly finding that rural areas offer significant business opportunities. Yet MFIs are aware of the challenges rural areas pose in terms of costs and risks.
This InSight describes the experience of ACCION's affiliates and partners in rural areas and relates lessons gleaned from that experience on how urban, commercially-oriented microfinance institutions can enter rural markets. In the full version of this document, the following case institutions are compared with respect to methodology, outreach, portfolio size and strategy:
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BancoSolidario, Ecuador;
- El Comercio, Paraguay;
- Uganda Microfinance Union, Uganda;
- Compartámos, Mexico;
- Banco do Nordeste, Brazil; and,
- Genesis, Guatemala.
Lessons Learned from ACCION’s Experiences in Rural Finance
Context Factors
The success of rural financial intermediation is heavily dependent on the socio-economic as well as legal, regulatory and supervisory environment. In some countries, such as Ecuador and Paraguay, ACCION partners have found that there are no simple relationship between poverty level and rural location of clients.
Mission and Profitability
While all ACCION partners have a clear social mission, earnings are also highly valued. It often takes time for management to accept rural expansion as a valid business strategy and even more time to implement the necessary changes associated with this strategy.
Several of ACCION's urban-based MFI partners have discovered that moving into rural areas comes with considerable advantages: there is usually less competition, clients are more open, and repayment may be higher than in urban areas. However, for some ACCION partners, rural activities have proved less profitable than urban loans mainly because costs are higher and margins are lower.
Widely-dispersed Clients
The wide dispersal of rural clients means that loan officers have to travel and work more autonomously than their urban colleagues. Strategies to both lower transaction costs and assure good client service include the use of mobile branch offices or small satellite offices in markets or low-density locations.
Effective decentralization also requires decentralized decision-making. This includes clearly established approval limits for loan officers for example. Decentralized decision-making, however, requires adequate checks and balances. Human resource management and training should be central to any rural expansion strategy.
Collateral
Rural low-income individuals often lack the physical assets required as conventional bank collateral. ACCION partners have therefore developed innovative approaches using a wide range of non-conventional securities, including household appliances and furniture, farm equipment and machinery, livestock and future crops.
Recruitment, Training and Motivation of Staff
In the case of some rural loan products, such as village banking, loan officers are often the only link between the MFI and the client. Loan officers offering rural group products should not only possess agricultural and financial skills, but also act as facilitators, conflict managers and motivators.
Reducing Risk through Portfolio Diversification
The unpredictable impact of weather, pests, price volatility and natural calamities on farm production means that rural lending is inherently risky. Loan portfolio diversification is the most important strategy to protect the rural lender from such covariant risks. ACCION partners moving into rural areas have tried to diversify their portfolios by financing a mix of loans with different purposes, loan terms and repayment schedules.
Product Mix
ACCION and its partners have found that a broad range of products helps institutions provide good client service, expand outreach, diversify portfolios, exploit urban-rural flows, and reduce overall lending risks.
Product Adjustment to Meet Rural Client Needs
The advantage of urban-based MFIs moving into rural areas is that they can transfer their knowledge about client service to the rural setting. When financing agricultural production or livestock enterprises, repayment schedules are adjusted to the projected household cash flow, accommodating fluctuations month by month.
Group lending does not offer as much room for flexibility as individual lending. Most ACCION partners do not view group loans as adequate mechanisms to finance agricultural activities, primarily because of limited loan sizes and regular repayment schedules.
Customer service also means quick response to client needs. Especially in agriculture, delays in access to finance can endanger an entire crop.
Standardization
To counter-balance the costs of responding flexibly to client needs and preferences, a high degree of standardization is necessary. For most rural lenders this means offering only one or very few loan products. ACCION partners however, have focused on reaching a high level of standardization within products, helped by the development of the generic ACCION rural credit manual.
Technology
In rural finance, technology plays two key roles: implementing effective internal control when direct supervision is difficult due to distance, and decreasing the cost of penetration into more remote areas.
Alliances with Input Providers and National Banks
Collaboration and strategic alliances with other rural institutions can significantly reduce costs and risks for MFIs.
Strategies for Reaching Rural Clients
The minimum requirements for the MFI to expand into rural areas include:
- A clear vision and commitment to rural expansion at board and management level;
- Thorough market research;
- Sufficient human capacity and financial resources dedicated to rural expansion;
- Adequate technology and infrastructure.
The selection of areas to start a rural lending operation should be based upon accessibility, client concentration, production risks, diversification of household income sources, and credit culture.
Questions? Comments? Please email ACCION Publications.