Keys To The Sustainability And Efficiency Of Financial Intermediation

In light of the largely disappointing experiences with programs of agricultural credit in the past few decades, the objectives of institutional sus-tainability and efficiency have acquired overriding importance for rural financial institutions. Little benefit can be provided to rural households over the longer run from credit institutions that prove not to be sustainable, or self-sufficient. The operational efficiency of an institution contributes to its sustainability and it also permits the institution to reach greater numbers of clients.

Several kinds of institutional strategies contribute to the sustainability of rural financial intermediaries. At the level of the institution itself, the main determinants of sustainability are the following, some of which are interrelated:

(a) Savings mobilization. The advantages of a strategy of savings mobilization have been mentioned already. A basic consideration is

49. Author's note: BRAC and RD-12 place more emphasis on supplying training and other inputs to the participants, and so some of their benefits may show up only with a time lag.

that an institution that does not generate its own sources of loanable funds is likely to find, sooner or later, that outside sources are not reliable. In addition, as noted above, awareness by borrowers that their own communities' funds are at risk is likely to enhance their commitment to repayment. Funds from governments and donor agencies are often regarded as quasi-grants by recipients. Most microfinance institutions do not initiate operations with a capacity to manage savings accounts, but development of that capacity is a key to their long-run viability.50

(b) Minimal dependence on subsidies. Grants or low-interest rediscount loans from governments and donor agencies often substitute for savings mobilization by financial institutions, but even in cases in which they complement savings deposits, experience has shown conclusively that the greater the use of such external funds, then the less sustainable is the institution. In part, this is due to the fact that access to low-cost sources of funds is likely to weaken the institution's drive for operational efficiency. In addition, for the reason mentioned above, the use of such funds may change borrower behavior in the direction of lower repayment rates. It also may encourage the institution to offer below-market interest rates on loans, a policy that creates other pitfalls.

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