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