Microfinance - a Financial Tool for Developing Rural Areas

Financial services - such as savings accounts, mortgages at reasonable rates, consumer credit, and insurance, cheap money transfers - are widely accessible in urban areas, while in rural areas these services are rather poorly provided. The superficial reason for such bad financial services in rural areas lies in the idea that people with little money are not suitable enough clients for financial institutions. Social discrepancies between urban and rural areas have been officially stated to exist in Latvia according to the report about social inclusion of the European Commission. Microfinance is seen as a widely accepted tool to combat these discrepancies. Nevertheless the vocabulary of microfinance can be understood only by professionals, even if it is intended for the masses. The sector is very fragmented, and there is not even a proper definition of the term yet. Activities in the Microfinance sector identified in Latvia can be assigned to the following models: credit unions; downscaling of commercial bank activities; and NGO based programmes and projects. Recommendations to improve the Microfinance sector in Latvia and especially to combine the existing trends of commercial banks to downsize their activities with supportive measures are: target subsidies toward institution building. providing incentives to encourage greater focus and innovation in the development of financial services for the poor; increasing cooperation and partnership, both among all types of microfinance providers and between them and mainstream banks, to increase financial service provision to the poor; improving the legal and regulatory environment for microfinance and for credit unions specifically Within all these discussions it is very important to emphasize that the access to advice, education and training is regarded as equally relevant as the access to finance. The advantage for Eastern Europe may be that there are much more industry sectors here to offer opportunities for rural development than in other regions of the world that suffer from bad infrastructures and low educational levels.