The Role of Membership Based Financial Services in Reaching the Underbanked, Primarily in Rural Areas
This paper has been prepared for the Second African Conference on Microfinance. It suggests at the outset that most challenges of access to financial services for the poor in urban areas have been met, or progress is promising, while the challenges of rural areas, and still the majority of poor people (in most settings) remain unanswered. It aims to highlight the optimal roles for member-owned financial institutions (MOFIs) to develop the financial sector in weak markets – in doing so it reviews some of the different issues surrounding the gaps in the financial system and the places where MOFIs may be best suited to fill those gaps.
The framework presented has been prepared as a guide to financial institutions as they look at expansion opportunities or to donors who wish to fund financial service development in targeted areas.
The paper begins by briefly setting out generic challenges faced by MOFIs. It then discusses the concept of carrying capacity and considers the question “what institutional typology is the most appropriate in which setting?” This section starts with a look at different settings (usefully summarised in a market characteristics matrix) and what types of institutions have worked best (to date) in those settings. The section concludes with a representation of the relationship between market potential and the cost of service delivery, which it calls the “Carrying Capacity Curve” for financial markets – this shows the acceptable level of cost of delivering the needed services in order to remain sustainable in different markets.
The paper then looks at defining the different types of institutions, their products, and their characteristics before moving on to address the challenges faced by different typologies. The paper sees the largest gaps in the financial system in areas with high incidence of poverty, not able to carry high cost institutions, have low population densities, and have tenuous links with financial systems of urban areas.