NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, February 16, 2012

Commercial microfinance institutions (MFIs) are an exemplification of making markets work for the poor. Are they indeed? A recent piece of research, comparing the lending performance of for-profit MFIswith not-for-profit MFIs, shows that though for-profit MFIs serve close to three-quarters of the market, the evidence does not seem to indicate that these MFIs lend indiscriminately when compared to their peers.

Supporters and critics of microfinance agree that the demand for reliable financial services is huge. However, the role of fully-commercial, profit-seeking institutions in providing such microfinance loans remains controversial. Critics argue that MFIs are nothing but brute moneylenders, the very beast that microfinance was built to root out. Supporters, however, argue that several hundreds of thousands of poor customers that such MFIs serve would otherwise have had even worse financial options. Would not serving them be a better social outcome?

Since the for-profit MFIs would be expected to pursue profit maximisation disproportionately more than the non-profit ones, in a recent piece of research, I compare these two categories of MFIs to examine whether profit maximisation by an MFI compromises on its social objectives.