Does low population density restrain microfinance development? The case of Niger
Niger is characterized by low population density. Distances involved to access basic services can constitute a major barrier to development. This paper analyzes the relationship between the distance separating households from microfinance institutions’ offices in Niger and the low level of development and performance of the microfinance sector in the country. The authors’ main findings suggests that distance can affect microfinance activities in three ways:
- the spatial distribution of the demand for finance results in a positive correlation between distance and portfolio risk,
- transaction costs are increased and
- by making monitoring costs higher, distance leads to less effective loan supervision.
To cope with these effects, microfinance institutions appear to adapt their policies by introducing more restrictive loan conditions, higher interest rates and more intensive screening. As a result the profile of borrowers as a function of distance is more and more biased towards safe and short-term activities such as trading, while producers (especially breeders) and poorer people are more likely to be left out of the credit market.
The researchers observe that the policy debate in Niger has focused primarily on the “professionalisation” of the microfinance sector and the establishment of a comprehensive legal framework. While ensuring good governance of microfinance institutions is definitely needed, this paper raises the question of whether credit markets in their current forms are not limited by other important factors which require public attention. For example, in some neighbouring countries such as Benin, the government guarantees the price of cotton. This greatly reduces the risk of lending to cotton producers and makes them a safe market for MFIs. Price guarantees, therefore, are an indirect means of subsidising rural financial services. Production in Niger is less export-oriented and receives less attention from authorities, which may be limiting rural outreach.