Microfinance – Not a Gold Mine, but Saving Livelihoods

Monday, October 31, 2005

2005 is the UN Year of Microcredit

Microfinance is widely viewed as a panacea for poverty alleviation and development; claims of income-generation activities and near-perfect returns on low-interest loans to the poor abound. However, this is only half of the story.

A recently-completed research project concludes that the overwhelming majority of microfinance institutions (MFIs) are at pains to break even. This is less than what had been initially promised by most promoters of microfinance. Nevertheless, the achievements by microfinance in terms of generating net social benefits for millions of working poor remain significant. The research team takes a critical look at how public policy can best support microfinance.

The project, undertaken by the International Labour Organization (ILO), the University of Geneva, the Graduate Institute of Development Studies in Geneva (GIDS) and Cambridge University, seeks to rationalize support strategies for microfinance. The Geneva International Academic Network (GIAN) provided financial support for the project, together with the Ford Foundation and the European Commission.

Approved for funding by the GIAN in 2002, the research project, “Microfinance and Public Policy” will be presented on 31 October and 1 November at an international conference in Geneva. Based on more than 50 surveys of microfinance institutions in Africa, Asia, Latin America and Eastern Europe, the research team concludes that most microfinance institutions have not reached the scale necessary for full cost-recovery and remain dependant on donor grants.

The research team found that many MFIs are technically efficient, but fail to be fully financially self-sufficient due to adverse local market conditions, like low population densities, insufficient diversification of economic activities and limited acceptance of certain cost-reducing techniques such as group lending. Yet, these MFIs generate substantial social benefits by stabilising livelihoods and incomes, helping the working poor to protect themselves against risks and empowering women. This has implications, according to the research team, for the promotion of microfinance by governments and donors. Rather than support individual MFIs on an ad hoc basis depending on financial performance or social impact, which varies greatly given the local context, aid agencies should base their decisions on efficiency.

According to project director, Dr Bernd Balkenhol of the ILO, “there are close to 10,000 microfinance institutions that effectively work with and serve the poor, yet almost all are partly financially unsustainable and subsidy-dependent. Yet many of them appear to operate efficiently. This should be reason to revisit one of the basic tenets of the microfinance industry, that the provision of financial services to the poor is financially sustainable under almost all market conditions.”

According to Prof. Daniel Fino of the GIDS, “microfinance institutions help the poor to cope better with risk, take advantage of modest income-generating opportunities and reduce their vulnerability. In the absence of such institutions, the poor would be worse off, as neither banks nor the State would want to take the place of microfinance institutions.” Prof. Edouard Dommen of the GIAN noted that “although efficiency in microfinance institutions does not automatically translate into full financial sustainability, the overall net social benefits far exceed those of inaction.”

Source: AllAfrica.com (link opens in a new window)