IV: Using Modern Technology for High-Quality Services in Rural Areas

Reaching the Client in Geographically Adverse Conditions: Can Outsourcing Increase Effectiveness and Efficiency?

Christine Westercamp[1]


Serving rural financial markets in developing and transition economies requires understanding the specific needs of the rural population in terms of financial products and services, designing adapted products and services on this basis, and defining an adequate organizational set-up.

The specific constraints of the agricultural and rural market induce high costs and risks. In this context, one of the main challenges is setting up adapted and cost-reducing processes, as well as organizational structures. The main issue in this chapter is: How can a financial institution organize the delivery of its services to the agricultural and rural market in a sustainable way?

To answer that question, we will review the specific constraints and costs of providing financial services to remote rural areas, and then discuss how branchless banking can help increase outreach and reduce costs, before concluding on policy recommendations.

Providing Financial Services to Remote Rural Areas: Specific Constraints and Costs

What Are the Constraints Faced in Remote Rural Areas?

Rural areas in developing countries are not homogeneous. But nevertheless they share a certain number of common challenges in the operating environment impacting the costs, the organizational set-up, and relationship of financial service providers and their clients.[2] Those constraints can be linked to the environment in which a bank operates or to its clients' characteristics.

Constraints linked to the environment are the following:

x Low population density usually results in higher distances between a bank's branch and its clients, thus increasing transportation costs and time spent in transport, both for the bank's officers and the clients themselves, and offering little opportunities for economies of scale;

x Additionally, poor road infrastructure very often makes access to markets difficult and increases both transportation costs and time spent in transport, for clients, branch staff, as well as head-office staff for supervision and audit missions;

x Lack of access to basic utilities results in higher costs for the bank to run a branch (necessity of a generator, fuel supply, office supplies) and difficulty for the clients to provide copies of documents, photographs, etc. This can potentially be offset by lower costs for renting branch premises;

x Poor communication infrastructure (telephone, internet access) makes it both more complicated to reach clients and more difficult and costly to communicate and update data in the MIS,[3] resulting in increased risk of fraud and error;

x Cash management is more costly and dangerous, as cash needs to be transported over longer distances, thus reducing frequency and entailing higher levels of liquidity necessary as compared to the level of activity;

x Difficulty of appointing and keeping educated staff in remote places entails higher training and supervision costs;

x When quality of portfolio deteriorates, enforcement costs may be higher in rural areas than in cities with faraway courts and police; moreover, in problematic cases, powerful elders may support customers instead of bank.

Constraints linked to clients' profiles:

x Often lower revenues in rural businesses, linked to typically smaller turnover and size, compared to urban enterprises, lead to lower loan amounts. Typically lower household income and wealth levels lead to lower deposit size per saver. This leads to negative impacts on the net income generated per money unit lent and, respectively, on the cost incurred per money unit deposited;

x Lower use of cash in the rural economy leads to less demand for financial services;

x Both agriculture and other rural economic activities targeting farmers are seasonal, which makes the banks' cash management more complicated and requires them to adapt loan repayment schedules. The latter may require expensive customization of IT systems;

x Lower financial literacy increases the need to train clients and explain how each product and service works. This needs to be taken into account when designing products and processes;

x In some regions, a bad debt culture has arisen due to failures under the old agricultural credit paradigm.

However some characteristics of rural markets can also be favorable and encourage financial institutions to work there:

x Competition on the financial market is often low, which decreases direct marketing costs and reduces the risks of multiple loans;

x Rural households are usually tied to their land, hence much less mobile than urban households, making borrower monitoring and supervision easier and more reliable;

x In many rural areas, loan repayment discipline is better than in urban areas due to higher social control, reducing the time spent by MFIs in contract enforcement.

  • [1] Senior Consultant, Horus – Development Finance.
  • [2] In this paper, the word “bank” is used in a broad sense, to refer to financial institutions offering microfinance services, whatever their regulatory status, thus including microfinance institutions.
  • [3] “Management information system” is the financial institution's internal management or “back-office” system.
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