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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Thursday, August 24, 2006

Microfinance is not enough for rural financial development says new ADB book

Daily Mirror: 23/08/2006"

FOR THE last two decades, microfinance has been seen as the answer to the problems of getting financial services to the poor in rural areas. A new ADB book questions that assertion and says that microfinance development is only one part of the solution. “While the development of microfinance is undoubtedly critical in improving access to finance for the poor and low-income households and their enterprises, it is inadequate to address issues of rural financial market development,” according to the book, Beyond Microfinance: Building Inclusive Rural Financial Markets in Central Asia.

The book, a culmination of more than two years or research and analytical work, studies how rural financial markets can be developed throughout emerging Asia by drawing upon the lessons and experiences of six Central Asian republics – Azerbaijan, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan, and Uzbekistan.

“The book represents an attempt to redress a serious imbalance in the attention paid to rural financial market development that has been created by the overwhelming interest in and emphasis on microfinance during the last two decades,” says H. Satish Rao, Director General of ADB’s East and Central Asia Department, in his foreword to the book.

“The emphasis on microfinance seems to have generated a view that microfinance development could provide an answer to the problems of rural financial market development.”

The books points out that while microfinance targets very small businesses and the poor, rural finance as a whole encompasses rural microfinance and cuts across all economic strata. “Institutional diversity in rural financial markets, therefore, is a goal worth striving for across the region,” the book says.

For instance, while microfinance institutions are certainly needed to provide access to financial services by poor households and microenterprises, the book says that rural people, including poor people, need deposit and payment services as much as – if not more than – access to credit. Thus, commercial banking institutions will inevitably remain the predominant players in rural financial markets across the region for the foreseeable future.

At the same time, strong rural financial institutions are in a much better position to provide credit to purely agricultural enterprises.

There is also an important role for other financial institutions, such as leasing companies and investment funds, to play in rural financial markets. In localized markets, credit unions can provide strong competition on the basis of price and quality of service to commercial banks.

“Overall, developing economies need a range of financial institutions, including robust commercial banking sectors, that can expand into rural areas to serve the highly heterogeneous demand for financial services of rural dwellers,” the book says.

The book is edited by Mario B. Lamberte, former president of the Philippine Institute for Development Studies; Robert C. Vogel, Executive Director of IMCC; Roger Thomas Moyes, ADB Rural Financial Market Specialist; and Nimal A. Fernando, ADB’s Principal Microfinance Specialist.

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