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.