Rural–urban financial inclusion: Implications on the cost sustainability of microfinance lenders

Despite the higher demand for credit among the rural poor, many commercial banks and microfinance institutions (MFIs) are averse towards microfinancing activities in rural areas due to their high‐cost implication compared to urban areas. Therefore, this study empirically investigates the effect of rural and urban financial inclusion on the cost sustainability of MFIs. To this end, a globally representative sample of 1729 MFIs' data covering the period 2008–2018 were analyzed. Contrary to the orthodox perception, our overall result revealed that lending in rural areas is more cost‐efficient than in urban areas, even after considering various proxies and endogeneity issues.