Sustainable rural finance: prospects, challenges and implications.

Market failures in rural finance and related issues of adverse selection, moral hazard, and transaction costs justify targeted interventions to ensure that services reach the poor and the un-banked sustainably. Service providers aiming at sustainability cannot rely on donor money and instead they have to generate their own operational income from provision of efficient services and setting the price for their services appropriately. However, while there is a general consensus on the 'components' that should go into the computation of interest rate to be charged by a micro-credit service provider (particularly those aiming to achieve the 'double-bottom-line' objective), the 'level' under each component is left to be fixed by each actor. This gives rise to various applications, which often is a cause for high level controversies among stakeholders in rural development, some justified while others not. Un-happy with these kinds of applications, some donors, NGOs, etc sought to establish a new model of service provision that aim at reaching and 'benefiting' the poor. Most of such efforts, often run by non-finance professionals, have the un-intended and/or undesirable effect of distorting the financial markets, 'crowding-out' the operations of sustainable microfinance operations as well as damaging the playing field for the private sector in general. While there cannot be a hard and fast rule regarding how a rural financial service should be run, there is clear room for supervisory bodies, the government and other key stakeholders to rectify most of the problems arising in this area. “….. Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs….” (Todaro, 1997).   Key words: Microfinance, sustainability, credit interest rate, transparency.