Pros and cons of microfinance
| Author | Francisco Vázquez |
| Position | IMF Monetary and Financial Systems Department |
| Pages | 65-73 |
Page 65
For the poor living in developing countries, there is often little recourse if credit is needed. Typically, it's the local moneylender or nothing. Microfinance institutions have been trying to fill the void and provide the seeds for grassroot economic activity. But are these small-scale institutions (offering typically high-cost loans) working? And should they be aiming to integrate with the formal financial sector? A new IMF review of microfinance looks at the issues and the challenges ahead.
Page 72
An estimated 400-500 million people worldwide do not have access to financial services other than informal moneylenders. This lack of access constrains private sector development and economic growth, and has distributional consequences, since the poor and those living in rural areas are disproportionately affected.Microfinance has been touted as a promising means to reach the financially underserved.
Is it? A recent IMF study examined the pros and the cons. The concept of microfinance is now several decades old. Its institutions provide small credits and other financial services to low-income households and very small informal businesses.
With constant innovation to meet the specific needs of the people they serve, microfinance institutions offer a menu of options. Through group lending, for example, they are able to provide credit, with minimal reliance on collateral, to group members who take turns borrowing and are jointly responsible for loan repayment.
Many microfinance institutions are owned and operated by nongovernmental organizations that receive grants, and sometimes loans, from multilateral development agencies, private charities, governments, and similar institutions. In parts of the world, they follow the model of financial cooperatives, funding their lending from members' deposits and capital contributions.While some have grown into formal, self-sustaining financial institutions, most remain informal and dependent upon donor funds.
But after years of experience with microfinance, surprisingly little is known about it. There are no comprehensive and authoritative data, for example, on the size of the industry or the populations served. Stylized facts, however, can be drawn from studies at the country and regional levels. These suggest that while the industry comprises a very...
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