| Abstract: |
What is the optimal size and composition of Rural Financial Cooperatives
(RFCs)? With this broad question in mind, we characterize alternative
formation of RFCs and their implications in improving rural households’ access
to financial services, including savings, credit and insurance services. We
find that some features of RFCs have varying implications for delivering
various financial services (savings, credit and insurance). We find that the
size of RFCs exhibits nonlinear relationship with the various financial
services RFCs provide. We also show that compositional heterogeneity among
members (including diversity in wealth) is associated with higher access to
credit services, while this has little implication on households’ savings
behavior. Similarly, social cohesion among members is strongly associated with
higher access to financial services. These empirical descriptions suggest that
the optimal size and composition of RFCs may vary across the domains of
financial services they are designed to facilitate. These pieces of evidence
provide some suggestive insights on how to ensure financial inclusion among
smallholders, a pressing agenda and priority of policy makers in developing
countries, including Ethiopia. The results also provide some insights into
rural microfinance operations which are striving to satisfy members’ demand
for financial services. |