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

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  • Thibaut Dehem
  • Marek Hudon

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.

Suggested Citation

  • Thibaut Dehem & Marek Hudon, 2013. "Microfinance from the Clients' Perspective: An Empirical Enquiry into Transaction Costs in Urban and Rural India," Oxford Development Studies, Taylor & Francis Journals, vol. 41(sup1), pages 117-132, August.
    • Handle: RePEc:taf:oxdevs:v:41:y:2013:i:sup1:p:s117-s132
    DOI: 10.1080/13600818.2013.787057
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    Citations

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    Cited by:

    1. Tutlani, Ankur, 2016. "Borrowers’ Participation in Group Borrowing," MPRA Paper 69506, University Library of Munich, Germany.
    2. Md Aslam Mia & Sunil Sangwan & A. H. M. Belayeth Hussain & Nurhafiza Abdul Kader Malim, 2022. "Rural–urban financial inclusion: Implications on the cost sustainability of microfinance lenders," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1899-1911, September.
    3. Lucia Dalla Pellegrina & Angela De Michele & Giorgio Di Maio & Paolo Landoni & Susanna Parravicini, 2021. "Group Meeting Frequency and Borrowers’ Repayment Performance in Microfinance: Evidence from a Quasi-natural Experiment in South Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 30(5), pages 447-477.
    4. Sefa Awaworyi Churchill, 2020. "Microfinance financial sustainability and outreach: is there a trade-off?," Empirical Economics, Springer, vol. 59(3), pages 1329-1350, September.
    5. Ankur TUTLANI, 2016. "Borrowers’ Participation in Group Borrowing," Turkish Economic Review, KSP Journals, vol. 3(1), pages 170-187, March.
    6. Tutlani, Ankur, 2016. "Effective Cost of Borrowing from Microfinance Institutions," MPRA Paper 69502, University Library of Munich, Germany.
    7. Ankur TUTLANI, 2016. "Effective Cost of Borrowing from Microfinance Institutions," Journal of Economics Bibliography, KSP Journals, vol. 3(1), pages 134-147, March.
    8. Marc Labie & Carolina Laureti & Ariane Szafarz, 2013. "Flexible Products in Microfinance: Overcoming the Demand-Supply Mismatch," Working Papers CEB 13-044, ULB -- Universite Libre de Bruxelles.
    9. Marthe Uwamariya & Claudia Loebbecke & Stefan Cremer, 2019. "Mobile Banking Impacting the Performance of Microfinance Institutions: A Case Study from Rwanda," International Journal of Innovation and Technology Management (IJITM), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-18, December.

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