Microfinance is big business. At the last count some 13 million people worldwide had received US$7 billion in loans. Have microcredit enthusiasts focused too heavily on female entrepreneurs? Is microcredit seen as a magic sky hook to winch the poor out of poverty?

A University of Manchester Institute for Development Policy and Management study reviews the microfinance revolution and argues the need for more strategic understanding of the financial service preferences of poor people.

Far from being feckless and irrational, as is often believed, the poor save whenever they can: the fact that they routinely lend small amounts in cash or in kind shows their propensity to save. Stereotyping poor people’s behaviour has led to provision of services unsuited to their needs or beyond their reach. The formal financial sector fails to serve the poor.

What are the savings, credit and insurance needs of the poor? When do they need access to lump sums? What are their life-cycle needs, such as festivals, marriage or funerals? What kind of emergency or opportunity necessitates borrowing? Findings include:

• Transactions, which on the surface appear as credit, are in fact closely linked to savings and insurance.
• Traditional categorization of finance providers is breaking down as semi-formal providers register themselves as banks, and formal institutions create microfinance windows or open pawnshops.
• The distinction between credit from formal banks and credit from moneylenders and traders has diverted attention from group-based reciprocal associations set up by the poor around the globe.
• Providing poor people with effective financial services can help reduce vulnerability but is not a panacea to reduce poverty.
• Peer pressure to repay, supposedly the key to the Grameen Bank’s success, may not be as significant as the fact that Grameen and similar microfinance institutions (MFIs), allow repayment in small installments and offer doorstop delivery.

Recommendations for future strategies include:

• Services for poorer households need to pay attention to the protective aspect of financial provision, in addition to the conventional emphasis on its role promoting enterprise.
• Mobilisation of the savings of the poor requires primarily an understanding of the tiny temporary surpluses that accrue to households with high frequency and seasonality.
• Financial packages cannot be designed without better understanding of poor people’s behaviour and preferences.

Source(s):
‘Financial Services for the poor and poorest: deepening understanding to improve provision’, Finance and Development Research Programme Working Paper #9, Institute for Development Policy and Management, University of Manchester by Imran Matin, David Hulme and Stuart Rutherford October 1999 Full document.

Funded by: UK Department for International Development (DFID)

id21 Research Highlight: 4 September 2001

Further Information:
Imran Matin
Institute for Development Policy and Management
University of Manchester
Crawford House, Precinct Centre
Oxford Road
Manchester M13 9GH
UK

Tel: +44 (0) 161 275 2800
Fax: +44 (0) 161 273 8829
Contact the contributor: idpm@man.ac.uk

Institute for Development Policy and Management (IDPM), UK

Other related links:
'Money matters – can microfinance reduce poverty?'

'Co-operation or competition? Microfinance developments in Southern Africa'

'Financial services for the poor: is commercialisation the answer?'

'Banking for all: extending credit access in Africa'

Improving the Impact of Microfinance on Poverty: An Action Research Programme

Visit the UNDP Special Unit for Microfinance

More research from the Virtual Library on Microcredit