Microfinance inadequate for rural growth: ADB study

Microfinance is not the answer to the problems of getting financial services to the poor in rural areas. It is only one part of the solution, according to study assisted by the Asian Development Bank (ADB).

"While the development of microfinance is undoubtedly cri-tical 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 a book entitled, 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," H. Satish Rao, director general of ADB’s East and Central Asia Department, said 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 book 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.

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. Unless other financial institutions can provide the same services.

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 said.

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. – TPT