As the donor community embraces microfinance as a means of alleviating poverty, microfinance institutions (MFIs) are increasing rapidly. Is the microfinance concept being embraced uncritically? Are MFIs efficient, sustainable and able to aid the poor climb out of poverty?

Research by the University of London’s School of Oriental and African Studies (SOAS) entitiled ‘Donors’ support for microcredit as social enterprise: a critical reappraisal’ challenges donors to question much of the microcredit hype. It shows that while microfinance  programmes can contribute to poverty reduction, it is naïve to imagine the world can be changed by instruments of financial engineering.

With subsidies now deeply unfashionable, microcredit programmes stress ‘market-based solutions’. The formula used by Bangladesh’s Grameen Bank (group lending, joint liability incentives, weekly repayment schedules and meeting, compulsory savings and progressive loans) has been adopted universally.

The ‘successes’ of Grameen and its many imitators have encouraged the explosive growth of the microcredit movement. The number of borrowers has trebled in the past five years to 55 million. Participants at the November 2002 Microfinance Summit — convened by the World Bank-sponsored Consultative Group to Assist the Poorest (CGAP) – endorsed a goal to reach a hundred million poor households by 2005. CGAP now has over 1 500 members.

Is there an inherent tension between financial sustainability and outreach to the poor? MFIs are expected to be ‘subsidy-independent’ within unrealistically short time frames and to generate surpluses to expand their social mission. This is leading to stresses for microfinance institution managers and their clients.

Targeted borrowers often take part in low-return activities in saturated markets and are subject to shocks beyond their control: some have to turn to moneylenders, sell assets or migrate to find work to tackle new problems of MFI-induced microdebt. The poorer segments of the poor are excluded from group lending. Programmes tend to empower those with some power to begin with. Often groups are put together by NGO staff who do not know communities and their structures.

The report also refers to evidence that:

• Although subsidisation is supposed to cover start-up costs only, most programmes remain heavily subsidy-dependent. Only one in 20 microfinance programmes is on course towards sustainability.
• Despite producing a high loan repayment rate and charging an interest rate of 20 per cent, Grameen remains subsidy-dependent on donors.
• The bulk of programmes are in Asia: start-up and administration costs in areas of low population density such as sub-Saharan Africa are formidable.
• Microcredit programmes established in haste risk exploiting existing hierarchical structures in order to achieve financial sustainability.

The author warns that microcredit rhetoric and reliance on standardisation of products and delivery mechanisms is preventing the donor community from recognising the need for a diversity of approaches. Donors are urged to:

• recognise that replication of ‘best practice’ will not produce the same results in other locations in the absence of similar, usually locally-specific, facilitating conditions
• query whether it is realistic to expect MFIs to have ‘a double bottom line’ with both financial/institutional and social objectives
• learn more about the real economic environments in which the poor conduct their income-generating activities and microbusinesses
• encourage MFIs to liaise with other finance sector players
• explore how microequity grants to the most marginalised could complement microcredit programmes.

Source(s):
‘Donors’ support for microcredit as social enterprise: a critical reappraisal’, Discussion Paper No. 2002/127, United Nations University, World Institute for Development Economics Research (UNU/WIDER), by Machiko K. Nissanke, December 2002 Full document.

Funded by: WIDER, United Nations University

id21 Research Highlight: 9 June 2003

Further Information:
Machiko K. Nissanke
Economics Department
School of Oriental and African Studies
Thornhaugh Street
Russell Square
London WC1H 0XG
UK

Tel: +44 (0)20 7898 4542
Fax: +44 (0)20 7 898 4559
Contact the contributor: mn2@soas.ac.uk

School of Oriental and African Studies (SOAS), UK

Matthew Odedokun
UNU World Institute for Development Economics Research
Katajanokanlaituri 6 B
00160 Helsinki
Finland

UNU World Institute for Development Economics Research

Other related links:
'Fine tuning microfinance: better financial systems for the poor'

'Money matters – can microfinance reduce poverty?'

'Innovations in microfinance: new product development in Bangladesh'

Improving the Impact of Microfinance on Poverty

More research from the Virtual Library on Microcredit

See the UNDP Special Unit for Microfinance