What Matters in Rural and Micro Finance

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This paper is a brilliant resumé of …well, what matters in rural and microfinance. It is full of wise advice for donors and policy-makers. Dieter Seibel starts by providing historical perspective, reminding readers about the two worlds of development finance – the old needs-driven approach and the new institution-building approach. He provides an excellent tabulated summary of how these two worlds differ in terms of a whole variety of factors, e.g. policy environment, legal framework, institutional focus, selection of clients, agricultural banks, rural banks, remote areas, sustainability and many more. He reviews the rural and micro finance market, noting that one might conclude from the CGAP Micro Banking Bulletin that there are relatively few viable MFIs in the world but also pointing out that when you take into account rural credit cooperatives in China, rural and village banks in Indonesia, rural banks and savings and credit cooperatives in the Philippines, community and rural banks in Nigeria and Ghana, and the vast numbers of banks, cooperatives and self help groups in India, the numbers don’t look quite so small. Worldwide the number of informal financial institutions probably runs into the tens of millions.

In the next part of the paper, Dieter pursues the theme of what matters. He deals with each of the following topics in turn:

  • Client experience matters – illustrated with some wonderful anecdotes.
  • Origins matter – poverty matters, informal finance matters, history matters, crisis matters, development matters and culture matters.
  • Financial systems matter – capital matters but capital transfer has undermined rural finance and development, savings matter but only in conditions of macroeconomic stability, savings and credit matter but which one comes first, financial intermediation matters, financial sector policy matters, the legal framework matters, interest rates matter, institutions matter (projects don’t), competition matters, prudential regulation and effective supervision matters, knowledge matters.
  • Institutions matter – including all these aspects: ownership, autonomy, viability, efficiency, sustainability, self-reliance, outreach, portfolio diversification, lending technology, innovation and flexibility, reform and more.
  • Operational aspects matter – good practices matter (not best practices, just good ones), institutional size matters but not absolutely, profits, incentives, repayment, information, delivery systems, financial products and loan protection all matter.
  • What matters to the poor? Access to savings and credit, rural enterprise viability, household portfolio diversification, market segments and differentiated financial products all matter, the non-poor matter, as does autonomy and the culture of labour division.
  • Donor policy and coordination matter.

And so to a succinct conclusion with advice on what sustainable development and sustainable rural micro finance require, what governments have to provide and donors might contribute. If you haven’t time to read it all, there is an executive summary and even the contents page has useful asides. You should read it all though.

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