Institutional Providers of Rural Finance and Microfinance Services

The distinction between microfinance and small and medium enterprise (SME) finance and the recognition of the different types of financial institutions catering to those
segments are important to the assessment of the adequacy of access and the effect of regulation. While different categories of borrowers often face similar constraints, lend­ers commonly distinguish between microfinance, which refers to credit provided to poor households and to informal (i. e., unregistered) microenterprises, and SME finance, which refers to credit given to enterprises registered as large microenterprises, small businesses, and medium-size enterprises.

image052There are several important differences between the two categories of borrowers. Microfinance is most often provided by non-bank institutions such as NGO MFIs that are often based on the group-lending approach (although numerous microfinance loans may consist of loans to individuals rather than to groups), as well as various membership – based financial cooperatives and mutual-assistance associations. SME finance is provided mainly by banks, building societies, and non-bank financial institutions (NBFIs) and does not use a group-lending approach. Another important difference is security: Microfinance is almost never formally secured, although informal security (i. e., not legally binding) in the form of collateral interest over household goods and tools is commonly used, while SME finance usually allows a firm’s assets or personal guarantees to legally secure small business loans. Those differences create a natural separation between the institutions that specialize mainly in microfinance and the institutions that provide small business loans, although some institutions do provide both kinds of finance services.

Institutional providers of financial services to low-income rural households, microen­terprises, and small businesses fall into several categories according to the scope of regula­tion, type of ownership, and type of services offered. The institutions can be differentiated on (a) whether they are required to obtain a license to carry out financial intermediation activities, to be registered with some central agency (but not required to obtain a license) that will provide nondeposit credit-only services, or to be registered as a legal entity; (b) what type of organizational format, including ownership and governance aspects, they have; and (c) what types of financial services are permitted and provided. The principal categories are

• government programs or agencies for rural finance, microfinance, or SME finance

• non-bank, nonprofit NGO MFIs

• membership-based cooperative financial institutions (CFIs)

• postal savings banks (PSBs) or institutions

• development finance institutions

• specialized banking institutions (usually licensed for limited operations, activities, or services to differentiate them from full-service commercial banks) such as rural banks, microfinance banks, and non-bank finance companies

• commercial banks

Key differences in the organization and operation of those different institutions are highlighted in table 7.1. The institutions differ in terms of what products and services they are allowed by law and regulation to offer; whether they are subject to rigorous prudential regulation, internal governance structure, and accountability; and how funds for administrative and business operations are sourced. The differences arise from the applicability of legal and regulatory requirements, and those differences have important

Institutional provider

Organizational

format

Ownership

Regulatory status and how regulated

Financial services permitted to be offered

Government rural or micro or SME finance programs or agencies

Trust fund or agency

Government

Not regulated by banking authority

Wholesale or onlending funds to participating institutions

Non-bank/nonprofit/ NGO MFIs

Nonprofit foundation, trust, or association

Private sector entities or organizations

Not regulated by banking authority

Microfinance loans only; no voluntary deposits

Membership-based cooperative financial institutions (CFIs)

Savings and credit cooperative organization (SACCO) or credit union

Members

Not regulated by banking authority, but may be regulated by department in cooperative

Savings and time deposits and loans to members only

Postal savings banks (PSBs)

State-chartered

institution

Government

Not regulated by banking authority

Savings and time (fixed) deposits only and money transfers

Development finance institutions

State-chartered

institution

Government

May or may not be regulated by banking authority

Wholesale certificates of deposit, loans, and credits

Specialized banking institutions

Rural banks

Limited liability company

Private sector investors or shareholders

Licensed or supervised by banking authority

Savings and time deposits, loans, and money transfers

Microfinance banks

Limited liability company

Private sector investors or shareholders

Licensed or supervised by banking authority

Savings deposits, microfinance loans, and money transfers

Non-bank finance companies

Limited liability company

Private sector investors or shareholders

Licensed but not necessarily supervised by banking authority

Wholesale certificates of deposit, loans, and credits

Commercial banks

Limited liability company

Private sector investors or shareholders, or state-owned institution

Licensed or supervised by banking authority

Demand and savings and time deposits, loans, credits, money transfers, and foreign exchange; full banking services

Table 7.1. Institutional Providers of Financial Services

implications for the outreach and sustainability of the institutions. For indicators of struc­ture, outreach, and performance of MFIs, see box 7.1.

image053

Not all institutional providers of financial services listed in table 7.1 may exist in a given country for a number of important reasons, including the stage of development of the rural finance and microfinance sector. In a number of countries, rural finance and microfinance services may be provided by several types of institutions.

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