Microfinance Meets the Market

2008

Microfinance institutions have proved the possibility of providing reliable banking services to poor customers. Their second aim is to do so in a commercially-viable way. We analyze the tensions and opportunities of microfinance as it embraces the market, drawing on a data set that includes 346 of the world’s leading microfinance institutions and covers nearly 18 million active borrowers. The data show remarkable successes in maintaining high rates of loan repayment, but the data also suggest that profit-maximizing investors would have limited interest in most of the institutions that are focusing on the poorest customers and women. Those institutions, as a group, charge their customers the highest fees in the sample but also face particularly high transactions costs, in part due to small transactions sizes. Innovations to overcome well-known problems of asymmetric information in financial markets were a triumph, but further

Microfinance has become a program of choice in the international development community. The World Bank has promoted microfinance programs under the idea that poverty alleviation can be accomplished by mainly providing credit. 1 As such, these policies are often replicated throughout the developing world. This replication is done through international organizations adopting a standard of best practices for the microfinance field. Best practices consist of a complex set of standard by which all banks must adhere if they receive funding from the World Bank or International Monetary Fund. These best practices, following neoliberal economics, lay out how microfinance should operate according to the World Bank. This dissertation looks specifically at this replication through institutional mimicry by questioning the actual impact of the neoliberal economic policies enshrined in the best practices model of microfinance. It examines several distortions that neoliberal best practices create on two dimensions: economic and socio-cultural. The economic distortions concern issues of debt cycles, self-sufficiency, and the role of the economically active poor with the argument that clients who participate in Microfinance Institutions (MFIs) face increasing levels of poverty. Furthermore, it is argued that socio-cultural distortions like social capital creation, local conditions, and gender targeting increase poverty as well. Using a comparative case study analysis of MFIs in Latin America, this dissertation demonstrates economic and socio-cultural effects for MFIs departing from best practices: first, the lower level of indebtedness of their clients and, second, the offering of a wider array of social programs in the community. These findings are a preliminary indication that departing from best practices contributes to poverty alleviation. Essentially, I argue that for microfinance to be successful it needs to question neoliberal best practices within microfinance policies and focus on tailoring microfinance programs to local political and social conditions.

2003

Microfinance is a development success story. In Latin America, the IDB has been a supporter from the earliest days of the region's experiments with microcredit in nongovernmental organizations. Its most important contribution, however, has been to promote the development of private microfinance institutions that are regulated and supervised by the relevant authorities in their countries. This support has extended much-needed financial services -savings as well as credit-to hundreds of thousands of microenterprises, enabling them to consolidate and grow.

Economic Research-Ekonomska Istraživanja, 2017

Of the total global population, at least 14.5% are living on less than $1.25 a day, 34% of the females in the least developed countries are unable to complete their primary education, and some 805 million are believed to be food insecure. To bring these numbers into accordance with the Millennium Development Goals, there are at least a dozen of different programmes operating around the world. Microcredit, being one of those programmes, is considered superior to the rest for being the only participatory approach and for being general enough to cater for a number of policy interventions. Microcredit or credit to the poor is provided under two very different mechanisms; the welfarist mechanism and the institutionalist mechanism. Each of these mechanisms has its advocates, as well as, its critics. The current paper empirically evaluates the two approaches in a systematic way. By using purposively collected data from the North West Pakistan and vigorous methodologies, we show that commercialization of microfinance institutions has indeed shifted the focus from either poverty reduction or women's empowerment. Instead, the focus is now on more secure and profitable advances. Moreover, we also show that the welfarist approach in eradicating poverty and empowering women is superior to the now popular financial system approach.

Lack of collateral and access to credit has been one of the reasons why the traditional banking institutions do not extend credit to the poor. This has led to the increment in the poverty level of these individuals. For this reason, MFIs came into existence to play the role of providing financial services to the poor. The requirement of no collateral increases the risk of default and information asymmetry. Thus, the joint liability group lending model was developed to curb this. There have been debates on whether MFIs can provide services to the poor in a sustainable way and communicate the benefits of these services so as to reach those left out by the traditional banking institutions. Robinson (2001) stated that there is an absurd gap between the supply and demand for microfinance services. Among the economically active poor of the developing world, there is strong demand for small-scale commercial financial services for both credit and savings but the demands for these services are rarely met by the formal financial sector. One reason is that the demand is generally not perceived. Another is that many actors in the formal sector believe wrongly that microfinance cannot be profitable for banking institutions (Robinson 2001). In this critique, we will be analyzing and evaluating the effectiveness of joint liability group lending in reducing information asymmetries and also looking at the relationship between the financial performance of MFIs and their outreach services to the poor in developing countries.

Publication of the Inter-American …, 2006

In recent years, microfinance has greatly expanded the outreach of the financial system to millions of households in Latin America and the Caribbean. This expansion has taken place through a diverse set of institutions-called microfinance institutions-that are reaching an increased number of low-income households. The success experienced by these institutions has caught the attention of traditional providers of financial services, such as commercial banks, which are now entering into this market. However, there is a fundamental question that has not yet been sufficiently explored: what is the magnitude of the microfinance market in Latin America and the Caribbean? This report aims to answer this question through the use of institutional as well as household survey data. Data shows that, around 2005, the number of microfinance borrowers was about six million, with most clients (65 percent) being reached by regulated financial institutions. When we use national household surveys, we find that 4.5 million borrowing households are connected with a microenterprise (probably microfinance clients), while an aggregate number of eight million has overall access to credit in the region. This report also offers a simple and practical framework to improve measurement of access, demand and use of financial services. Data from mid 2001 (17 countries) Regulated MFIs 60 901 936,936 962 Downscale (Banks & Financieras) a 21 343 365

In Goodhart C Financial Development and Economic Growth Palgrave, 2004

Microfinance institutions deliver financial services for low-income individuals via innovative techniques. This paper first explains the nature and scope of such techniques, and then delivers an overview of recent trends. In conclusion, the paper calls for international donors' and local governments' support in at least three main areas, so that recent innovations can further enable microfinance institutions to meet both their selfsustainability and social objectives.

2009

The purpose of this paper is to analyze the impact of public policies in various countries of South America on the development of microfinance (MF). A broad definition of public policy has been used in this work, as it covers specific legislation seeking to develop more inclusive financial systems; government participation in official bank programs; second-tier bank funds; the use of targeted funds and guarantee and intelligent subsidy schemes, etc. Particular attention is focused on financial system regulatory frameworks, as they tend to play a fundamental role in the success of such programs. An analysis is made of best practices recommended by international agencies, matching them against the existing framework for microfinance activities in the countries analyzed. The main conclusion that can be drawn is that despite the very varied nature of the initiatives pursued, one common element observed in all the countries surveyed is the role played by commercial banks in MF development. Nevertheless, note should be taken of the direct and indirect role played by the state in encouraging the involvement of the financial sector as the leading provider of MF, a role that is in general based on criteria of selfsustainability and commercial practices.