Low and volatile agricultural incomes, poor connectivity, low population density and limited information are just a few reasons that have kept commercial banks away of rural areas in developing countries, where nonbank financial institutions (such as MFIs, cooperatives, or credit unions) have played an important role.
However, these rural institutions tend to be small and often suffer from bad risk management, poor governance, and weak technical and managerial capacity. These constraints are in turn passed on to the borrowers in the form of higher interest rates and credit rationing. The lack of human and organizational capital among lenders is a type of market failure where public interventions may be both effective and market friendly (Besley, 1994).