Microfinance from the Clients' Perspective: An Empirical Enquiry into Transaction Costs in Urban and Rural India

Abstract

Inclusive financial sectors are important for development in terms of equity and efficiency. Although microfinance has developed rapidly, little is known about the actual costs for clients to access microfinance services, except for interest rates. The insufficient outreach of microfinance in rural areas remains one of the main challenges for the sector. This paper uses the individual data of 255 clients in India and the data of 48 groups to which they belong to compare the transaction costs (TCs) between urban and rural microfinance clients. The results suggest that the TCs incurred by urban microfinance borrowers are globally higher than those incurred by their rural counterparts (4.81% compared with 3.35%), mainly because of their opportunity expenses and individual costs that are unrelated to microfinance groups. Yet, when considering a household's total monthly expenditure level, the microfinance TCs constitute a much higher relative expenditure for rural households than for their urban counterparts. Total TCs are still relatively low compared with the main cost of loans, i.e., their interest rates.

Acknowledgements

We thank Barbara Harris-White and participants of the Second European Microfinance Conference in Groningen for comments on earlier versions. This research has been partly carried out in the framework of an Interuniversity Attraction Pole on Social Enterprise funded by the Belgian Science Policy Office.

Notes

¹ The Microfinance Information Exchange, Inc. is a non-profit company dedicated to improving the information infrastructure of the microfinance industry in developing countries, by promoting standards of financial and operational reporting, offering readily accessible data, and providing specialized information services. For further information, visit www.themix.org

² Data from the MixMarket.

³ Data on castes included in Census 2011 were not yet published when this paper was written.

⁴ These results are in line with some rural data from Gonzalez-Vega (2003): “the median distance to the nearest financial institution ranges from 2 km (post office branches) to 5 km (commercial banks, cooperative banks); the median time taken to travel to the nearest commercial bank, cooperative or regional rural bank is 30 min (post offices are available at closer proximity).” In our case, we consider only commercial banks as we are working with SHGs.

⁵ There is indeed no significant difference between both areas concerning penal charge costs as the percentage of cheque bounces, i.e., the number of check bounces divided by the number of loans is about 20% for rural groups and 4% for urban groups.

⁶ Study based on 78 SHGs with 1160 members in Karnataka State.

⁷ Data from the National Sample Survey Organisation (NSSO). NSSO has been carrying out All-India surveys on a quinquennial bases on consumer expenditure and employment–unemployment.