Determinants of cost to client in accessing rural financial services : a case of Zambia's Chongwe District

Abstract

Despite widespread acknowledgement that financial inclusion plays a vital role in the general livelihoods of low income populations, the majority of the global population remains without adequate access to affordable financial services. The World Bank estimates that approximately 2.5 billion of the global population do not have access to financial services, with the majority of them residing in rural areas .To this effect, in recent years, there has been an increase in both theoretical and empirical literature on financial accessibility studies in rural areas that seek to ascertain the various factors that affect access to financial inclusion which have cited high direct cost- to- client in accessing financial services as a one of the prominent factors hindering financial inclusion. Notwithstanding various intervention measures to address the high direct costs associated with access to finance, which include lowering interest rates and bank fees, transport costs and other associated transaction costs, generally clients’ costs to access financial services remain high. However, to effectively address this cost problem, there is a need to understand how it is constituted. As hypothesized, in addition to the known direct costs mentioned above there are other hidden costs that determine the overall cost to the client in accessing financial services which may have a profound effect on the client. These include psychological costs, economic costs and regulatory and compliance costs On this premise, this paper seeks to empirically investigate and identify the overall costs to clients in accessing financial services in the rural areas of Zambia. These factors are important in facilitating smooth policy formulation in the areas of financial inclusion, and rural and agricultural finance. Cross sectional primary data from 232 household was used for this study. Probit and the Heckman selection models were used to analyze cost to the client factors affecting the likelihood of accessing financial services (credit) by rural households. Lessons from the theory of the firm stipulate that the client’s costs of accessing financial services are driven by utility maximization under the agency costs theory. This is attributed to the fact that both the principal (financial service provider) and the agent’s (client) behaviour is driven by the need to maximize the utility associated with accessing and provision of credit services (financial services). Depending on the clients’ perception of the utility they are likely to derive from the ability to access and use credit services (financial services), a decision is made, either to access or not. This client behavior that leads to a discrete choice to be made is modeled in a logical sequence, starting with the decision to access credit services, and then followed by a decision on the cost channel to access to credit services (financial services).