Microfinance

Microfinance and Agricultural Development

In the past decade, there has been an increased focus on microfinance as a tool for poverty alleviation and development, including agricultural development, from different sectors including academics, international community, donors, and policymakers in low income countries. This increased focus on microfinance is a result of an increased awareness ofthe large existing demand for financial services among the urban and rural poor, in developing countries.

In the mid 1990’s, it was considered that 80 percent of the world’s population did not have access to formal financial services, either credit or savings, and this of course included most of the poor people in developing countries throughout the world (Robinson, 1998). One way to explainthis phenomenon is that traditional banks find it unprofitable to extend small loans and deposit services to these people: microfinance is not profitable for them. Government subsidized loan programs exit in most developing countries and provide cheap credit, but access to this services for low-income households is not widespread. On the other hand, informal lenders provide widespread services butat a higher cost. Saving services are also frequently unavailable to poor households. While government has a role to play in the provision of microfinance services, as well as donors from more developed countries, there is also a need for self-sufficient institutions to intermediate in the micro financial market, in order to provide widespread micro financial services.

Although all thesestakeholders have different motivations and approaches to the financing of the poor, there seem to be an emerging consensus on the matter, which has gradually included several of the following conceptual perspectives:

a) Financial services matter for the rural and the urban poor;

b) Although numerous sources of informal finance offer valuable services to the poor, these are not sufficient toaccelerate income growth;
c) Lack of access to a wider range of (formal) financial services still represents an important constraint on entrepreneurship;
d) Increasing the array of financial options available to poor entrepreneurs will be welfare-improving from a social perspective. (Gonzales-Vega and Graham, 1995).

This paper is going to start by introducing the concept ofmicrofinance and microfinancial institutions, as well as a short historical review of microfinance; then it will focus on state-owned development banks., since one of the explicit objectives of these kinds of institutions is to enhance agricultural development; the third point will be a review of successful micro financial institutions and their organizational designs, as well as an introduction to theemergence of a new paradigm that shifted the focus to sustainability, a case study of a successful microfinancial institution will follow; finally, some words on how microfinance influences the agricultural sector and its impact on agricultural development, through another case study.

Microfinance and Microfinance Institutions

Microfinance is often defined as “financial services for the poor andlow income clients”[1]. Microfinance can refer to small loans (microcredit) and other financial services provided by financial institutions that describe themselves as “microfinance institutions”. From a broader perspective, microfinance is a movement in itself, a vision where the low-income households can have access to good quality financial services (including savings, insurance and moneytransfers), in order for them to finance their productive activities, in a world where income inequalities often limit these households access to these kinds of opportunities.

This last element, the existence of income inequalities, is what makes microfinance so important in low-income countries. “Financial services are pivotal when investment opportunities and wealth endowments diverge, as is...