December 2004, insights, Issue #51

Realising the potential of microfinance

Microfinance is a key strategy in reaching the Millennium Development Goals (MDGs) and in building global financial systems that meet needs of most poor people. Although microfinance has demonstrated the potential to reduce poverty, its impacts have varied. Perhaps as a result of these inconsistencies, few donors have prioritised microfinance in their strategies to achieve the MDGs. Microfinance can have positive effects everywhere, if services respond to the particular mission and social context of a microfinance institution (MFI), as well as to the needs of its clients. This issue of insights asks: "How can we be more realistic in our expectations of microfinance? How can we help MFIs to achieve sustained impacts such as alleviating poverty or reaching out to more poor people? How can microfinance realise its potential?"
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Other articles in this issue:

Microfinance and the MDGs

Microfinance, and the impact it produces, goes beyond just business loans. Poor people use financial services not only for business investment in their microenterprises but also for health and education, managing household emergencies, and meeting the wide variety of other cash needs that they encounter. The availability of financial services for poor households is therefore a critical factor for the achievement of the Millennium Development Goals.

The wider impacts of microfinance

Most MFIs seek to promote the business of their clients and thereby raise client incomes. Some MFIs also invest in services intended to achieve direct social impacts in the form of raising awareness on health, encouraging children's education, promoting women's empowerment within households and so on. MFI achievements on this front have been relatively well-documented. Less well-documented are impacts that go beyond individual clients, their households and their businesses and occur within the wider community. Such impacts relate to poverty in the wider community, to social inequalities of various kinds and to the lack of participation by poor people, particularly poor women, in public decision-making forums.

A participatory learning system for microfinance

A key objective for impact assessment of microfinance programmes is 'internal learning' by field staff and programme managers about what is working, what is not working and why, in order to improve programme operations. Success of microfinance and livelihoods programmes can be enhanced if they are based on sound understanding and analytical skills and greater commitment amongst both staff and clients. MFIs would do well to invest in training that reinforces programme values and empowers clients, for this. The Internal Learning System (ILS) offers one such way forward.

Managing trade-offs

Achieving both profitability and strong social performance is the ultimate promise of microfinance. It is not impossible, but neither is it easy, and relatively few micro-lenders are there yet.

Measuring and managing social performance

In recent years donors and practitioners have demonstrated a renewed interest in and commitment to understanding how to reach poor people effectively, assess their level of poverty, and judge the social performance of MFIs. However, for all the public and increasingly private money that flows to microfinance, there has been limited guidance on how to reach, serve, and have a positive and sustainable impact on the lives of poor and very poor people. It is time MFIs realise and deliver on this vision by becoming more responsible for who they reach and how.

Assessing social performance cost-effectively

Many MFIs have an explicit social mission that goes beyond profitability such as reducing poverty and exclusion by providing good quality, reasonably priced and sustainable financial services to poor people who are normally excluded from regular banking systems. The link between microfinance services and poverty reduction, however, is far from simple. Positive impacts cannot be taken for granted.

Sites for sore eyes

Further web resources.

Acronyms

A list of acronyms used in this issue.

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Forthcoming issues

• Climate change
• Corporate social responsibility

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