Microfinance Operations Hesitate Reaching the Very Poor

A meta-evaluation on microfinance released by the Evaluation Cooperation Group
of international financial institutions reports that micro-finance operations
have had difficulty in reaching the very poor.
Microfinance–defined broadly to cover both small loans to the poor, often but
not exclusively based on group liability, as well as small loans to
microenterprises, based on character or projected cash flow–has emerged as an
important innovative form of financial intermediation over the last 30 years.
Multilateral Development Banks have played an important role in the evolution of
the industry, initially seeing it as an important instrument for poverty
targeting and more specifically for targeting at poor female borrowers, and more
recently as a means of expanding the access of poor households and
microenterprises to a range of financial services.
The institutional modalities of microfinance have changed markedly. Grameen
banking innovated group liability for dealing with asymmetric information,
enforcing repayment and helping the poor. But Grameen banking itself has moved
to individual lending in its subsequent lending methodology--but with a special
window for the very poor. This shift is based on the observation that above a
certain value of loan, both lenders and borrowers have a preference for
individual lending.
The donor community has strongly encouraged the shift towards greater
commercialization of MFIs on the grounds that this would reach more poor
borrowers on a sustainable manner. However, a move in this direction runs the
risk of an increased concentration on the less poor, as these are more likely to
take out larger and hence lower cost loans. There is also a concern that
aggressive marketing of micro-finance may push poor borrowers into taking
high-cost loans. Also, one recent analysis found that, as group-lending MFIs get
bigger, they lend less to the poor and to women.
Microfinance operations require the following for their success: Financial
sustainability on the part of the participating MFIs; High-standard consultancy
and technical assistance to them as well as to their regulators; Sound
regulation and monitoring, and Flexibility in product design. However, to reach
the very poor microfinance intervention requires careful design and a means of
preparing them for full participation.
The Evaluation Cooperation Group (ECG) is a network of evaluators of
multilateral development banks (MDBs) established in 1996 to: strengthen the use
of evaluation for greater MDB effectiveness and accountability; share lessons;
harmonize performance indicators and evaluation methodologies and approaches;
enhance evaluation professionalism within the MDBs and collaboration with the
heads of evaluation units of bilateral and multilateral development
organizations; and facilitate the involvement of borrowing member countries in
evaluation and build their evaluation capacity
The ECG is composed of the African Development Bank, Asian Development
Bank, European Bank for Reconstruction and Development, European Investment
Bank, Inter-American Development Bank, International Monetary Fund, and
the World Bank Group.
The United Nations Development Programme Evaluation Group and the Evaluation
Network of the Development Assistance Committee of the Organization for Economic
Co-operation and Development are observers. The Business Analyst