Microfinance Operations Have Difficulty Reaching the Very Poor

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London, UK, November 29, 2010 - A metaevaluation on microfinance released by the Evaluation Cooperation Group of international financial institutions reports that micro-finance operations have had difficulty in reaching the very poor.

Microfinance–defined broadly to cover both small loans to the poor, often but not exclusively based on group liability, as well as small loans to microenterprises, based on character or projected cash flow–has emerged as an important innovative form of financial intermediation over the last 30 years.

MDBs have played an important role in the evolution of the industry, initially seeing it as an important instrument for poverty targeting and more specifically for targeting at poor female borrowers, and more recently as a means of expanding the access of poor households and microenterprises to a range of financial services.

The institutional modalities of microfinance have changed markedly. Grameen banking innovated group liability for dealing with asymmetric information, enforcing repayment and helping the poor. But Grameen banking itself has moved to individual lending in its subsequent lending methodology--but with a special window for the very poor. This shift is based on the observation that above a certain value of loan, both lenders and borrowers have a preference for individual lending.

The donor community has strongly encouraged the shift towards greater commercialization of MFIs on the grounds that this would reach more poor borrowers on a sustainable manner. However, a move in this direction runs the risk of an increased concentration on the less poor, as these are more likely to take out larger and hence lower cost loans. There is also a concern that aggressive marketing of micro-finance may push poor borrowers into taking high-cost loans. Also, one recent analysis found that, as group-lending MFIs get bigger, they lend less to the poor and to women.

Microfinance operations require the following for their success:

  • Financial sustainability on the part of the participating MFIs,
  • High-standard consultancy and technical assistance to them as well as to their regulators,
  • Sound regulation and monitoring, and
  • Flexibility in product design. However, to reach the very poor microfinance intervention requires careful design and a means of preparing them for full participation.

About ECG: The Evaluation Cooperation Group (ECG) is a network of evaluators of multilateral development banks (MDBs) established in 1996 to: strengthen the use of evaluation for greater MDB effectiveness and accountability; share lessons; harmonize performance indicators and evaluation methodologies and approaches; enhance evaluation professionalism within the MDBs and collaboration with the heads of evaluation units of bilateral and multilateral development organizations; and facilitate the involvement of borrowing member countries in evaluation and build their evaluation capacity
The ECG is composed of the African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank, International Monetary Fund, and the World Bank Group.

The United Nations Development Programme Evaluation Group and the Evaluation Network of the Development Assistance Committee of the Organisation for Economic Co-operation and Development are observers.

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