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September 2009

N°3 - What balance between financial sustainability and social issues in the microfinance sector?

 

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Microfinance and non-financial services: an impossible marriage?

Microfinance institutions (MFIs) can - in addition to their classic products - develop non-financial services: vocational training, technical assistance, agricultural or health education. The comparative assessment of five Latin American MFIs (including FINCA Peru) shows that performance varies depending on how non-financial services are integrated into usual activities, but that this diversification is possible and even seems to make a great improvement to the quality of the portfolio. However, the choice of the integration model (“linked”, “parallel” or “unified”) and its implementation must be carefully tailored to the context >> Download the Iris Lanao Flores and Philippe Serres's paper

What resources to finance the development of the microfinance sector?

Microfinance is booming and requires considerable additional funds. The equity of microfinance institutions (MFIs) needs to be strengthened; private investors – that invest when certain conditions are met – can play a key role in this development. In terms of borrowed funds, although recourse to global markets may not be a solution, it is essential to mobilize public deposits and bank debt in order to meet current needs. To a lesser extent, donors must also support growth in the sector. In order to mobilize all these sources of financing, MFIs must hybridize themselves and strike the best possible balance between social mission and profitability targets >> Download the Fouad Abdelmoumni's paper

Recent developments in the impact and mechanisms of microfinance

Microfinance has aroused widespread enthusiasm over the past 20 years. Its specific credit methodology (group solidarity, small loans, etc…) was thought to solve a number of informational problems on the credit market, promote access to credit and consequently help reduce poverty. Recent empirical research has given a better understanding of the mechanisms of microfinance and the impact it actually has on poverty >> Download the Esther Duflo and William Parienté's paper

Striking a balance between affordable rates and satisfactory profitability in microfinance institutions

The interest rates charged by microfinance institutions (MFIs) are calculated on the basis of their financial situations and profitability targets. To make these rates more affordable for their low income clients, MFIs can conduct an analysis of their financial situation using four key criterias – the aim is then to optimize them. MFIs’ profitability targets are set by their shareholders and could be better assessed and more transparent – this can ultimately lead to a readjustment that will bring down rates while maintaining an “adequate” level of profitability >> Download the Elodie Parent's paper

Managing the social performance of microfinance institutions

Microfinance is booming. Beyond financial performance, it is essential for the sector not to lose sight of its social objective. The most innovative MFIs are reacting quickly to the first cases of abuse, implementing tools to manage and increase the sector’s necessary social footprint. Such endeavours need to be underwritten by the regulators, who have a critical role to play – particularly in terms of increasing the transparency of lending conditions >> Download the Jacques Attali's paper

The role of development finance institutions in good governance for microfinance

Development finance institutions, via their involvement in the sector, give microfinance greater access to private financing. They also play a decisive role in the governance of microfinance institutions (MFIs) by helping to build a coherent shareholding, sitting on supervisory boards, and providing tools for internal governance processes. They also contribute to ensuring there is a balance between the social mission and the level of profitability. Moreover, they must be able to withdraw from the MFI’s shareholding at the right moment >> Download the André Laude's paper

Microfinance, an opportunity for socially responsible investment

Microfinance used to be seen as a simple development tool, but now provides private investors with attractive investment opportunities. It creates social benefits by helping to democratize access to financial services in developing countries and offers a stable return with little correlation to financial markets. By making the sector accessible to private investors, microfinance investment vehicles (MIVs) have managed to substantially increase funds available. However, amounts are still limited and banking exclusion consequently remains high. This can only be remedied with wider and more responsible private sector involvement >> Download the Jérôme Audran and Yannis Berthouzoz's paper

How can a MFI manage to have a commercial status and still target “vulnerable” people as a core client group?

When loans are extended to “vulnerable” people, too many of them are left overindebted – this could lead to a highly risky credit crisis. If microfinance institutions need to develop into fully-fledged banks – particularly in order to mobilize deposits from the public – they must also first and foremost help make the sector more responsible. By strengthening and clarifying the way they are organized, implementing real collective discipline, while not forgetting their business culture based on ethical values, they will be able to motivate their employees, satisfy their customers and, at the same time, achieve commercial success >> Download the Dr. Claus-Peter Zeitinger's paper

Microfinance: on the road to responsible finance?

Although serious abuses may be in the minority, the microfinance sector is not without flaws – or temptations. Some highly competitive markets put considerable pressure on costs to the detriment of service quality, while others that are less competitive tend to overbill their clients. It is essential for the sector to come back to the fundamentals of the profession based on a sound knowledge of counterparts and “long-term” relationships with clients. It must also be a priority to protect the latter. The action of CGAP and Proparco provides an example of how donors can support existing initiatives in this field and promote their dissemination – this will create the conditions for the development of responsible finance >> Download the Elisabeth Littlefield and Luc Rigouzzo's paper