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Lending in areas with low financial inclusivity

The microfinance industry has come a long way towards establishing best methodologies. While mainstream MFIs have been successful in penetrating developed and populated areas, only a low percentage of them have achieved penetration in rural and less densely populated areas.

There are a variety of challenges hindering penetration of MFIs in rural areas, among them are

  1. Good reputation

In rural areas, reputation precedes the product or service. In order for microfinance institutions to establish trust in a community, they have to tailor make a product and ensure they follow through on their promises to the community. Broken promises by a microfinance institution can lead to very dramatic trust issues.

2. Trust between members

Most of the loans issued to rural communities by microfinance institutions are mostly to groups of people. Certain members of the community are usually reluctant to join a group due to previous relationship with a member or members in the group where trust was broken. It is crucial for the MFIs to offer mentor-ship to the members in order to rebuild trust.

3. Lack of information

Given the level of illiteracy in rural areas, a lot of information is usually passed through word of mouth. This can lead to negative information being passed along about a microfinance. It is therefore critical for MFIs to embark on member education before offering their products to the community

4. Rigidity of the product

Currently, products are not tailor-made to fit the fluctuating incomes for the poor rural areas. MFIs need to invest in research in order to offer accommodating products to the community. This may include flexible repayment structures

Conclusion

While some of the MFIs have managed to overcome the above barriers, many more constraints have to be overcome to significantly expand microfinance lending in rural areas. MFI institutions should continue to build upon previous successes in order to push forward penetration levels.

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