Posted by Adrian Merryman, CEO, Small Enterprise Development Agency

This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at Accion.

We have made a lot of progress toward financial inclusion, especially when it comes to cities. Walk into most major cities in low-income countries, and you will probably find outlets of banks and microfinance institutions that lend to virtually all who qualify as economically active with a viable business model and of credible character.

But that is only 28 percent of the story. The urban focus ignores the 72 percent of people in low-income economies who live in rural areas.  Unfortunately, organizations striving to achieve financial viability are conflicted when it comes to serving rural clients.  The steps we take to pursue operational sustainability are not steps that will immediately benefit the 72 percent.

We can explore this paradox in the case of Tanzania, where I work. Currently, while urban areas are moderately well served with microfinance loans, there is only an 8% penetration of formal financial services in the rural areas, which include roughly 75% of the population. MFIs predominantly provide loans to those living and working in the urban/peri-urban areas.

Why? Well, why not? If you were leading an MFI aiming to break even, you might be insane to move into rural areas. Your interest rates would rise to account for a lower average loan size and the high overhead related to client acquisition and infrastructure.  If you were a mission-driven microfinance organization, you would be caught: you would want to reach out to the rural, under-served but your cost structure wouldn’t allow it.

Frankly, in order to be financially viable and reach out to the 72 percent, my organization, SEDA, realized that we have to change the way microfinance works. We reasoned that if we can decrease our cost per borrower to roughly 50% of the other major sustainable MFIs in Tanzania, we could charge a reasonable interest rate and still succeed financially in the rural areas. Consider the following possibilities:

  • Increase productivity: What if loan officers could serve more clients, thereby decreasing the cost per borrower?  A simple change such as moving from weekly to monthly repayments can make a big difference, ironically with minimal to no impact on repayment rates with the right culture and controls in place.  We change the microfinance model, as long as we do so in a way that is intelligent and informed.
  • Leverage technology to decrease overhead costs, increase responsiveness and reduce fraud: One great expense in rural areas is the overhead necessary to acquire clients, collect payments, maintain a physical presence, and communicate with headquarters. But what if our loan officers were equipped with technology that allowed them to act in lieu of a brick-and-mortar presence to take deposits, leveraging the concepts behind mobile money?  What if all paper were removed from the system and we could respond to loan requests within 24 hours? What if we could biometrically and GPS tag every client and staff transaction?
  • Provide credit across the agricultural value chain: Agriculture comprises a significant portion of rural cash flows. While we focus on the smallholder farmer, we are now looking at the whole value chain beginning with the comparative advantages of a given geography and what the markets are demanding in terms of type of product and quality. We then ensure that the appropriate inputs are used in the right ways to produce the products the markets desire, and that the market participants send their buyers to the region to make purchases.

But perhaps the most important ingredient to going rural is maintaining mission-driven microfinance. If my organization did not maintain our mission, we might play it safe, honing our efforts on and creating profits in the urban areas. Instead, being mission-driven mandates us to seek creative solutions that push beyond urban boundaries, expand our product line, and listen to our clients.

So with regards to the question of what it would take to reach full financial inclusion by 2020: it is going to take smart, structured attention to the rural 72 percent. It is going to take creative solutions that might make us question what we know about microfinance in order to aggregate clients easily and effectively reduce acquisition cost. It’s going to take institutional capacity building that is mission-driven and responsive to the needs of those who are not yet our clients.

These challenges seemed immense when I lived in the U.S. and ran a microfinance network. Now, from where I sit in Arusha, Tanzania, running an MFI and spending every day balancing our social and financial bottom lines, the challenges are even greater—but our goal of reaching the 72 percent makes it worthwhile, and our goal of doing it sustainably while scaling rapidly and prudently is well within reach.

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Adrian Merryman is the CEO of the Small Enterprise Development Agency (SEDA) in Tanzania. Over the past two years, the SEDA team has increased its clients by over 260 percent and achieved the lowest cost-per-borrower in Tanzania, a PAR-30 of 1.4% and sustainability.  Prior to SEDA, Adrian served as CEO of the Opportunity International Network, as CEO of two European companies, as a private equity investor and as an investment banker.  He has also served on the boards of numerous companies and Christian ministries in Europe, the US and the Philippines. He holds an MBA from Harvard Business School and is a graduate of Swarthmore College.

Have you read?

The Secret (Financial) Lives of Rural Residents – What Every Market Researcher Needs to Know

Accessing the Future: Beyond the Traditional Microfinance Space

Time to Work Together? Corporations and NGOs have a ways to go with Mobile Financial Services