The role of informal microfinance institutions in saving

efore they adopt new technologies and make major farm investments. Assumptions
concerning lenders are that informal lenders exploitative and hence charge interests
rates that entail large element of monopoly profit”.
(Adams and Graham 1984 in Sarris, 1966:6). Based on this kind of thinking and reasoning
rural financial institutions were expected to provide cheap and sometimes free credit for
rural development. However, most rural financial institutions established in 1950’s and
1960’s did not achieve planned objectives. Writers of the Ohio school and others have
criticized institutions that followed supply led approach. Low interests rates, subsidized
credit, poor loans processing and delivery, centralized decision making and bureaucracy
have been cited as the major cause of failure of rural financial institutions performance in
developing countries.
Credit enables small farmers and micro-enterprises to finance their development and
income generating activities. Moreover, issues which justify the need for credit to micro-
enterprises and small farmers always limit small farmers and micro-enterprises access to
credit. Levitsky and Prasad (1987: 1) suggest reasons which reduce small enterprises access
to institutional finance due to lending to small enterprises is considered to be risky, banks
and financial institutions are biased in favor of lending to large corporate borrowers, the
administrative costs of lending to small are always considered to be high, small enterprises
seeking loans are always perceived to be unable to provide accounting records and
physical collateral.
‘’The financial institutions can encourage efficient allocation of the stock of tangible wealth
by bringing about changes in types of asset holders. Second, financial institutions can
encourage efficient allocation of new investment by intermediation between savers and
entrepreneur investors. Third, they can increase the rate of accumulation of capital by
providing increased incentives to save, invest and work’’ (Padmanabhan 1988:8). Financial
institutions can help small farmers and micro-enterprises to save, invest in profitable
ventures and increase accumulation of capital for overall rural development and poverty
reduction.
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