Banking for the poor

The myth that poor households in developing countries are not creditworthy or able to save has been firmly put to rest in recent years. Poor households, it has been found, place special value on reliable and continued access to different types of financial services, available at reasonable cost and catering to their specific needs. Credit and savings facilities can help poor rural households manage, and often augment, their other wise meagre resources, thus enabling them to acquire adequate food and other basic necessities for their families, as well as invest in enterprises to sustain their livelihoods.

Since this discovery, microfinance, or financial services for the poor, has been hailed as the most important tool in poverty alleviation. However, not everyone agrees. According to Nimal Fernando, “There are three camps of thought on the issue of financial services for the poorest. The first camp rejects the hypothesis that the poorest can be reached with financial services on a sustainable basis. The second camp advocates that the poorest of the poor can be reached not only on a sustainable basis but also on a large scale. The third camp recognizes that the potential for reaching the poorest on a sustainable and a large-scale basis is limited but that the search for innovative approaches to expand the outreach to the poorest must be continued."

Policy-makers have an important role in facilitating this debate and also in creating the legal and economic environment within which suppliers of micro financial services can operate successfully.

Library Resources

resource title type year resource
Análisis de Segmentación de Mercados Huérfanos Paper 2015

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El Fondo Multilateral de Inversiones (FOMIN) presenta un estudio de segmentación de clientes, con el objetivo de determinar y contrastar las diferencias entre los distintos perfiles de clientes de diversas entidades financieras, y los “no clientes”, es decir la población que no está utilizando los servicios financieros disponibles en el país. Una de las conclusiones más significativas del estudio es que en muchos casos la falta de crédito para los hogares de la zona se explica más por temor a no poder pagarlo que por la falta de acceso o por falta de capacidad de pago. Los hogares sin crédito son aún más vulnerables que los hogares clientes de los CCC, no tanto por el nivel de ingresos que es ligeramente inferior, sino por la inestabilidad del ingreso y por las características del jefe de hogar, que tiene un menor nivel de educación, es de edad avanzada y es mujer en por lo menos un tercio de los casos. El estudio concluye que cada segmento de este grupo –los retirados, los empleados sin negocio, los empleados con negocio y los microempresarios– presenta rasgos específicos que deberían ser tomados en cuenta tanto en el diseño de los productos como en la estrategia de comercialización de los mismos. La inclusión financiera de estos segmentos representa un reto por la condición de vulnerabilidad en la que se encuentran y requiere estrategias que permitan atender las necesidades de esta población.

Farmer bank, farmer terms Article 2010

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The search for financial services tailored to the needs of, and controlled by, rural people led the National Federation of Naam Groups to set up their own savings and loans institution in 1992 - the Baoré Tradition d’Epargne et de Crédit (BTEC).

BTEC was inspired by the traditional community-based village bank. After a difficult start, as of late 2010 BTEC began a process of transforming into a professional network. The key challenge for the BTEC Network has always been to reconcile growth and its social purpose.

Author SOS Faim
Publisher Sos Faim
Number of Pages 8 pp.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa, Northern Africa, Southern Africa, Western Africa
Keywords Rural Finance, Financial Institutions
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Pro-Poor Financial Services for Rural Water Article 2010

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Access to safe drinking water and to sanitation facilities is a pre-condition for achieving most of the Millennium Development Goals (MDGs). While it helps to reduce extreme poverty, food insecurity, and child mortality, it also has a positive influence on education, particularly for girls. Additionally, it reduces maternal mortality. Despite considerable progress in Asia, more than one billion people have no permanent access to safe drinking water, and more than two billion have no access to basic sanitation facilities. This scenario is particularly critical in sub-Saharan Africa, where more than 340 million people lack access to safe drinking water, and more than 500 million have no access to improved sanitation facilities.

Access to Finance in Andhra Pradesh Report 2010

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The report presents the results from the first ever household survey on access to finance in India which includes information on microfinance in an Indian state, Andhra Pradesh – the “Mecca of MIcrofinance” or the state in which micro finance has achieved its greatest success to date in India. The report also provides some context of these results by describing the history of microfinance in Andhra Pradesh and the current landscape of financial services providers serving the poor.

Author Johnson, D.; Meka, S.
Publisher Institute for Financial Management and Research Centre for Micro Finance
Number of Pages 51 pp.
Primary Language English (en)
Region / Country Global, Asia
India
Keywords Rural Finance, Agricultural Microfinance
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Creating Pathways for the Poorest: Early Lessons on Implementing the Graduation Model Brief 2009

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People at the very bottom of the economic ladder are often excluded, or exclude themselves, from microfinance. Their income is usually too low and unreliable to permit repayment of loans or investment in anything but basic food consumption. In some countries the very poor are served by safety net programs, which usually take the form of cash transfers, food aid, or guaranteed employment schemes. Starting in 2006, CGAP and the Ford Foundation have been exploring how a "graduation model" can create pathways out of extreme poverty, adapting a methodology developed by BRAC in Bangladesh.

The graduation model targets the “ultra poor”—people who have no assets and are chronically food insecure. Safety nets usually help these very poor people survive but don’t allow them to build up assets. The graduation program combines support for immediate needs with longer term investments in training, financial services, and business development so that within two years ultra poor people are equipped to help themselves move out of extreme poverty. This Brief discusses early lessons from the implementation of the graduation model.

Creating Pathways for the Poorest: Early Lessons on Implementing the Graduation Model Brief 2009

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People at the very bottom of the economic ladder are often excluded, or exclude themselves, from microfinance. Their income is usually too low and unreliable to permit repayment of loans or investment in anything but basic food consumption. In some countries the very poor are served by safety net programs, which usually take the form of cash transfers, food aid, or guaranteed employment schemes. Starting in 2006, CGAP and the Ford Foundation have been exploring how a "graduation model" can create pathways out of extreme poverty, adapting a methodology developed by BRAC in Bangladesh.

The graduation model targets the “ultra poor”—people who have no assets and are chronically food insecure. Safety nets usually help these very poor people survive but don’t allow them to build up assets. The graduation program combines support for immediate needs with longer term investments in training, financial services, and business development so that within two years ultra poor people are equipped to help themselves move out of extreme poverty. This Brief discusses early lessons from the implementation of the graduation model.

Microfinance and Climate Change: Threats and Opportunities Article 2009

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This Focus Note proposes ideas for what we can do to combat climate change at the household, microbusiness, MFI, and systemic levels.

The authors emphasize in their conclusion that each MFI should find its own way of addressing climate change, weighing the risks of inaction against the cost and risks involved in institutional change.

Desa Pakraman and Lembaga Perkreditan Desa in Bali: A study of the relationship between customary governance, customary village development, economic development and LPD development Paper 2008

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Lembaga Perkreditan Desa (LPD) is a network of savings-driven financial institutions regulated by provincial law in Bali which has evolved since 1985 solely based on local human and financial resources. It has two unique characteristics. First, being owned and governed by the customary village, it is fully integrated into Balinese culture. Second, it is universal and inclusive in outreach, with 1356 LPDs in 1433 customary villages and an average of 1.4 savings accounts and 0.4 loan accounts per Balinese family. Based on an analysis of case studies and secondary data, this study aims to deepen our understanding of the relationship between governance, institutional performance and economic development as a basis for designing strategies to strengthen smaller institutions and manage the risks of larger ones. Customary governance at village level is found to be their crucial strength, lack of effective supervision at province level a major weakness to be addressed.

Author Hans Dieter Seibel
Publisher Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ); Promotion of Small Financial Institutions (ProFI); Bank Indonesia;
Number of Pages 27 pp.
Primary Language English (en)
Region / Country Global
Keywords Economic Development
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Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance Technical Note 2008

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Focus Note 43 Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance examines key issues that policy makers and regulators face when deciding how to regulate branchless banking targeting the unbanked poor. Based on diagnostic assessments conducted in seven frontline countries (Brazil, India, Kenya, Pakistan, the Philippines, Russia and South Africa) the Focus Note offers practical recommendations on the proportionate regulation of this dynamic and promising phenomenon at the convergence of financial services and telecommunications.

The Importance of Trade Credit and its Mysterious Absence from Microfinance: Recommendations for the Microfinance Community Paper 2006

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The authors contend that despite the fact that its role is rarely officially recognised by traditional microfinance institutions (MFIs) or their multinational supporters, trade credit has a significant presence among financing options for low-income consumers and microentrepreneurs. Fafchamps’ definition is quoted in this paper, where “trade credit is a form of short term financing that is linked to the purchase of goods”. The authors state that trade credit (being most commonly in the form of supplier credit and consumer credit) exists primarily to promote profits. It fills a financing gap for individuals to purchase consumer goods or for micro-entrepreneurs to purchase supplies.

The authors also state that they can summarise sufficient evidence from specific countries and regions to demonstrate the ubiquitous role of trade credit (although not enough to distinguish the magnitudes of the various types), despite the appearance of very little widespread notice of and no comprehensive studies on the strength of trade credit in microfinance.

The paper sets out to summarise the information about the scope and characteristics of the major types of trade credit and begins to draw some preliminary conclusions about the impact of trade credit on the poor using. The paper concludes with four recommendations targeted at the microfinance community, including MFIs, international donors, NGOs, and companies that serve poor clients:

  1. pay more attention to trade credit, especially as it pertains to existing clients;
  2. encourage pro-poor trade credit and credit bureau development;
  3. protect clients from predatory trade credit through relationship brokering and education; and
  4. seek opportunities to learn from and partner with trade credit providers, offering microloans to replace buyer credit where appropriate.
Author Jessica Droste Yagan and Heather Franzese
Publisher Harvard University
Number of Pages 22 pp.
Primary Language English (en)
Region / Country Global
Keywords Trade Credit, Supplier Credit, Buyer Credit, Consumer Credit
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Savings Banks and the Double Bottom-Line Report 2006

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Previous studies published in this “Perspectives” series have highlighted the essential role and the excellent record that savings banks have in providing access to finance. Their products and services are easy to use, are largely accessible and offered in a formal but sufficiently flexible structure. They also satisfy the functional needs of their customers. The research behind this edition of Perspectives was designed to examine whether the profitability of a savings bank is compromised by its built-in commitment to provide access to as many people as possible. Or, to put it another way: is the double bottom-line dimension a valid business model?

Savings banks have been described as the original microfinance institutions of the nineteenth and even eighteenth centuries (Siebel [2004]) but they come in various forms. Set up, sometimes by publicly-minded private philanthropists but just as often by local or national public finance bodies, savings banks are explicitly designed to provide a safe and reliable home for the savings of the mass population as well as some basic mechanism for making payments. One very common format is the local municipal savings bank set up by local government to provide these core savings and payments services. Another form, also dating as far back as the eighteenth century, is the mutually owned or co-operative savings bank which is often tied to a specific region or municipality. In countries with less of a tradition of public banking, community-based commercial banks have emerged to meet the same needs.

In some ways the savings bank movement is now a self-selecting body of banks and other financial institutions that wish to make clear their strong commitment to providing universal access to a wide range of financial services. For the specifically established savings banks this commitment to provide universal access to the services they offer is typically included in their founding statutes. A study conducted for the WBSI in 2005 discovered that there were 1.4 billion savings and loan accounts in institutions with a declared "double bottom line", i.e. the traditionally known one of the profit and loss account and the equally longstanding public policy goal of ensuring the financial needs of groups not well serviced by commercial banks. 1.1 billion of these were in savings banks. Savings banks even provide as many small-scale loans in numbers terms as the whole of the specialist microfinance community combined.

So this study concludes that savings banks have a built-in commitment to providing access and score relatively well on World Bank’s identified dimensions of access:

  • their simple, affordable products are useable for even low value and irregular financial needs;
  • their branch network and staffing make them open to all levels of society and households;
  • current regulation can give them the benefits of formality without compromising accessibility;
  • many savings banks have products to satisfy the full spectrum of customers’ functional needs.

Savings banks demonstrably deliver on their commitment to provide access. They are the biggest single suppliers of accounts among double bottom-line institutions and in the poorest fifth of countries where they operate they probably supply a quarter of all access. The report also concludes that savings banks can broaden their outreach without compromising profitability. Cost effectiveness plays an important part in sustaining profitability and broadening outreach and this links with keeping products simple and useable so they can run profitably on low volumes.

The implications of all this for policy-makers are that regulation must be applied in a way that enhances systemic stability without compromising access. It is particularly important that regulations designed for high risk, high value complex corporate transactions and/or city-based commercial business are not applied arbitrarily to lower value, less regular retail activity in less populated and remoter areas.

Author Peachey, S.
Publisher World Savings Bank Institute
Number of Pages 84 pp.
Primary Language English (en)
Region / Country Global
Keywords Savings Banks, Financial Inclusion, Social Mandate
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The Role of Microfinance in Rural Microenterprise Development: Results of an Internet Based Discussion Forum Paper 2006

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Syngenta Foundation for Sustainable Agriculture in Basel, Switzerland, works with rural communities in semiarid regions with the objective of improving their livelihoods through sustainable innovation in agriculture. In the context of The Economist’s Survey of Microfinance in the November 2005 issue, the foundation invited readers to help shape its strategy in support of the rural micro-enterprise sector by posting their contributions on a website set for that purpose.

To initiate the debate it posted four basic questions:

  1. How to link microfinance to rural entrepreneurs?
  2. What would it take to foster sustainable access to microfinance in the rural areas of developing countries?
  3. How can we particularly ensure access by rural women to microcredit?
  4. What other factors are constraining microenterprise in rural areas?

This paper puts together the key results from the contributions made to the discussion. In doing so it is based around the following subject areas:

  • Changing issues in agriculture, rural development and rural finance
  • Who are the real entrepreneurs, and what is their demand for financial services?
  • Women in rural enterprise
  • What would it take to foster sustainable access to microfinance in rural areas?
  • Frontier issues and recommendations

The paper concludes with the following recommendations:

  • Include among the institutions eligible for support formal, semiformal and informal financial institutions - in private, cooperative, public, community or mixed ownership
  • Place a special emphasis on support to small institutions which include people from the lower segments of the population as owners or customers
  • Support the development of appropriate legal frameworks, conducive regulation and effective (delegated) supervision of self-reliant and sustainable RMFIs
  • Provide incentives-driven schemes for upgrading institutions in terms of legal status, supervision, and outreach
  • Support the injection of equity into RMFIs for bridging, leveraging and upgrading purposes
  • Support linkages of informal and semiformal RMFIs, including SHGs in remote and marginal areas, with the banking sector and their upgrading to the level of regulated institutions as seen fit
  • Support RMFIs in establishing business associations with apex services to member institutions
  • Support the development of sustainable BDS (with particular emphasis on value-adding innovations) in private ownership or in the hands of business associations of rural entrepreneurs
  • Do not support temporary or ad-hoc solutions with no chance of institutional sustainability
  • Initiate cooperation between research funding and development agencies in RMF; provide funding for longitudinal impact studies, eg, of linkages and upgrading of RMFIs
Author Seibel, H.D.
Publisher Syngenta Foundation and University of Cologne
Number of Pages 23 pp.
Primary Language English (en)
Region / Country Global
Keywords Agricultural Microfinance, Rural Microfinance, Enterprise Development
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Microfinance helps poverty reduction and fisheries management Document 2006

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The aim of this policy brief is to:

  • Analyze trends in thinking and practice on finance for poverty reduction
  • Examine how small-scale fisherfolk use financial services, with a focus on West Africa
  • Identify the main issues and challenges in providing microfinancial services to fishing communities
  • Show that microfinance can be used to support fisheries management
  • Outline recommendations to improve the availability of suitable financial services in small-scale fisheries
Author Programme de la FAO pour des moyens d’existence durables dans la pêche (DFID/FAO)
Publisher FAO
Number of Pages 8 pp.
Primary Language English (en)
Region / Country Global
Keywords Livelihoods, Fisheries Sector, Financial Services
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Microfinance in Latin America and the Caribbean: How Large is the Market? Report 2006

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This report argues that there is a fundamental question that has not yet been sufficiently explored: what is the magnitude of the microfinance market in Latin America and the Caribbean? Latin American microfinance institutions have had significant success in expanding financial services to under-served populations. Progress, however, is still modest in terms of the number of people reached and the type financial service offered to low-income populations, but there I still ample room for expansion in both fronts. Furthermore, the expansion of services has not been equal among countries or even within a single country.

As a result, the report suggests that the uneven expansion of microfinance services in Latin America and the Caribbean raises a number of basic questions: What type of institutions are offering microfinance services? What is the size of the microfinance sector in each LAC country? What is the potential demand for microfinance? This report seeks to answer these questions by using data collected from microfinance institutions in 23 countries and analyzing household surveys from 12 countries.

Following a brief introduction, the report begins with a discussion on data covering the type and size of institutions offering microfinance services in the region. The third section analyses who is accessing credit and deposit services as reported by national household surveys and offers a framework to improve its measurement. Proper measurement will help key stakeholders in microfinance to better understand the limits and potential of microfinance as it has evolved in LAC. The last section compares the results of the analysis on access to financial services by low-income households using different data sources.

Author Navajas, S and Tejerina, L
Publisher Inter-American Development Bank
Number of Pages 53 pp.
Primary Language English (en)
Region / Country Global, Americas, Central America, Caribbean, South America
Keywords Outreach, Financial Access, Financial Products, Market Size
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Financial Inclusion and Millennium Development Goals Document 2006

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In a speech at the 4th Programme on Human Development and State Finances at CAB, Pune, Smt. Usha Thorat, Deputy Governor of the Reserve Bank of India began by stating “The financial system can play a role in reinforcing many of the objectives of MDGs involving savings, livelihood and economic infrastructure apart from providing an efficient payment system”. She also clarifies that by financial inclusion “we mean the provision of affordable financial services, viz., access to payments and remittance facilities, savings, loans and insurance services by the formal financial system to those who tend to be excluded”.

She goes on to suggest that “In the context of the overall fiscal constraint faced by most States, the linkages between the formal financial system and the community based organisations can be effectively exploited by the State Governments to meet the challenges of ensuring the achievement of the MDGs”. Two cases are briefly described to illustrate this point and refers to this point further at the end of the speech.

Of significant interest in this speech are highlights of some of the recent initiatives that RBI has taken to promote financial inclusion. These include:

  • RBI has exhorted banks, to make basic banking available through “no frills” accounts with either nil or very small balances as well as charges that would make these accounts widely accessible
  • The KYC procedure for opening accounts has been simplified for those persons with balances not exceeding Rs.50,000 and credits in the accounts not exceeding Rs.1,000,000
  • RRBs have been specifically advised to allow limited overdraft facilities in “no frills” accounts without any collateral or linkage to any purpose. The idea is that provision of such overdraft facility provides a ready source of funding to the account holder who is thereby induced to open such accounts
  • Banks have been advised by RBI to provide a General purpose Credit Card (GCC) facility at their rural and semi-urban branches. The credit facility extended under the scheme will be in the nature of revolving credit
  • A major recommendation of the Internal Group set up by RBI on microfinance (Khan Committee) is to permit banks to use microfinance institutions as business facilitators and correspondents to enable banks to increase their outreach and ensure greater financial inclusion
Graduating the Poorest into Microfinance: Linking Safety Nets and Financial Services Paper 2006

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This paper considers the questions of whether microfinance reaches the poorest and whether microfinance can be linked to safety net programs. It notes that today there is much debate about whether microfinance is for the poorest. Even in the case of MFIs that focus on reaching very poor clients, there are substantial numbers of people who are too poor to participate. For example, in Bangladesh, where MFIs are strongly focused on serving the very poor, MFI concentration is highest among the second poorest quintile group; it is lowest among the poorest quintile. Microfinance services are not aimed at the poorest communities. The first section considers why this may be so.

Following on from this, the paper states that microfinance is not the only way to help people. It notes that there are other services and institutions, such as “safety net programs,” that are usually better suited to the circumstances and needs of the poorest. One approach to helping the poorest gain access to appropriate financial services may be to start with safety net programs that will eventually help the poorest gain access to financial services.

This Focus Note explores a few cases where the poorest participate in grant-funded safety net programs, where they receive non-financial support, such as employment, food aid, training, etc., as well as support to graduate from their existing levels of poverty to a level where they can make good use of access to appropriate financial services. These examples raise the questions: Can microfinance help the poorest? If so, how? And can people “graduate” from being recipients of grants to becoming full-fledged microfinance clients?

Sustainability Banking in Africa Report 2005

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The key aims of this report are to define what sustainability banking means in the African context, to analyze the current role of the finance sector in the promotion of sustainability in Africa and in so doing provide examples that are potentially replicable elsewhere across the continent.

The drivers, challenges and opportunities of sustainability banking in Africa are highlighted, along with a series of current product, process and market innovations that demonstrate the potential of sustainability practice within the African finance sector.

Evidence from the Report points to the emergence of a dynamic business case for sustainability banking in sub-Saharan Africa –derived from new corporate governance standards, better regulatory frameworks, and increased financial sector capacity to implement sustainability practices and to enter or create new markets. Although there is an impressive range of financial innovations supporting sustainability in Africa, there is clearly the need for further innovation regarding efforts to understand and address African specific sustainability problems. The Report deduces that greater access to financial services and SME support can provide solutions for these problems, especially as financial “exclusion” is seen as an acute issue of concern in Africa, not simply as a matter of inconvenience, but potentially as a denial of a basic right.

Author UNEPFI
Publisher UNEPFI
Number of Pages 12 pp.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa, Northern Africa, Southern Africa, Western Africa
Keywords Sustainability Banking, Agribusiness Finance, Banking
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Macroeconomics of Microfinance Editors Note 2005

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Ahmad Jazayeri controversially argues that that the ultimate beneficiaries of microfinance are mostly multinational corporations and their associated traders. He says that we know the bulk of microfinance does not finance agriculture or manufacturing for exports but goes mostly to petty urban trade and consumption. Since poverty is essentially a rural phenomenon (most urban poverty originates in rural poverty) and over 2/3 of the poor live in rural areas and are engaged in mostly subsistence agriculture, Jazayeri suggests that microfinance is maintaining an unsustainable and inequitable economy.

To make microfinance pro-poor, Jazayeri believes that what is needed is a pro-poor growth strategy for the economy, which focuses on rural farm and non-farm production. He thinks the principal constraints are transaction costs (especially information costs and contract enforcement costs). Information technology and organizational innovations especially links between producers, exporters and financiers are crucial and such linkages can play a huge role in a pro-poor growth strategy.

Author Jazayeri, A.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa, Northern Africa, Southern Africa, Western Africa
Keywords Agricultural Microfinance, Agribusiness Linkages, Economic Growth
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Cómo construir instituciones financieramente autosuficientes que sirvan al más pobre Article 2005

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Impacto seguro: Cómo servir al más pobre construyendo instituciones financieramente autosuficientes y mejorando el nivel de vida de las mujeres más pobres y sus familias

Este artículo es parte de una presentación efectuada en la Cumbre del Microcrédito en Santiago de Chile en el año 2005. La idea central del mismo es una discusión sobre la contribución de las microfinanzas a la erradicación de la pobreza y en especial de las mujeres más pobres y sus familias. El autor anticipa que a pesar de que las microfinanzas están llegando a millones de personas pobres y teniendo un impacto en ellas, predominantemente en las mujeres, aún falta explorar los límites en el alcance de la provisión y los beneficios que las microfinanzas pueden generar. Asimismo, afirma que no es el nivel de pobreza de los clientes potenciales lo que determina el acceso e impacto, sino el diseño de los servicios que se proveen.

Este trabajo se basa en una revisión de la literatura y experiencia existente sobre el tema. Asimismo, contiene dos estudios de caso de las organizaciones SHARE en India y CRECER en Bolivia, que ilustran y apoyan las ideas y argumentos presentados. Éstos incluyen, para cada organización, una evaluación de la pobreza, una evaluación del impacto y una calificación. Sin embargo, el artículo está basado en influencias más amplias y en el aprendizaje del más amplio campo de las microfinanzas. El objetivo del autor es enmarcar cuestiones clave, explorar y desafiar el saber convencional, y quizá más importante, sugerir métodos más prácticos y prometedores.

El artículo está dividido en las siguientes secciones:

  • Evidencia de microfinanzas sostenibles para los más pobres, se examina la evidencia de que las microfinanzas sostenibles benefician a gente muy pobre, particularmente mujeres, y tienen impacto sobre ellas. Asimismo, examina los retos y limitaciones para la realización de estas metas. Se cita evidencia de dos estudios de caso para demostrar que las microfinanzas pueden beneficiar a mujeres muy pobres, tener un impacto significativo en sus niveles de pobreza y ser entregadas por organizaciones sostenibles.
  • Diseño y entrega de microfinanzas para los más pobres, se presenta una amplia discusión de temas operativos críticos que determinan la efectividad de las microfinanzas para los pobres y los más pobres. Asimismo, trata sobre el deliberado e inadvertido mecanismo que actúa para excluir al más pobre y sugiere medios para superarlos. Presenta sugerencias de cómo diseñar y entregar servicios de microfinanzas para los más pobres y discute cómo puede mejorarse la efectividad de las microfinanzas en el apoyo del crecimiento de ingresos y la reducción de la vulnerabilidad, como una estrategia activa y administrada. Finalmente afirma que la creación de una cultura de evaluación de impacto y de alcance a la pobreza dentro de las IMF es una parte central de esta estrategia.
  • Implicaciones para la industria de las microfinanzas se esbozan conclusiones y se presentan sugerencias prácticas para agentes mcrofinancieros y creadores de políticas. Se formulan las siguientes preguntas a modo de discusión: ¿Qué es lo que la industria debería realistamente perseguir? ¿Cómo puede la información acerca del desempeño y logro de metas ser recogida y utilizada? ¿Qué papel pueden representar los donantes y los creadores de políticas para alinear a la industria hacia un mayor enfoque en el logro de impactos positivos para la gente muy pobre?
Author A. Simanowitz, A. Walter
Number of Pages 52 pp.
Primary Language Spanish (es)
Region / Country Global
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Brazil’s Banks Adjust View of Their Market Document 2005

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Dick Meyer speculates that big countries like Brazil which are making large investments in IT may quickly expand microfinance through commercial banks and eventually outpace other countries that have invested in NGOs and other specialized microfinance institutions.

He quotes a New York Times article which explains how for decades, banks in Brazil almost exclusively catered to the middle and upper classes, aiming at a small but wealthy minority in a country with one of the world's most skewed income gaps. That is now starting to change, in part because Brazil's moneyed classes are already over-served by banks. That, analysts say, means the growth potential for financial institutions at the high end of the market is diminishing and they are waking up to the fact that the low-income classes are going to be the biggest source of growth for the future.

Under new rules, banks can set up kiosks and banking terminals in supermarkets and drugstores instead of opening and running new branches. Because Brazil's banks are highly automated, these terminals tend to be inexpensive to operate, making it easier for banks to get a return on their investment. To encourage lending to the poor, the government also allows banks to use up to 2 percent of reserve requirements - money that would otherwise be parked at the central bank - to offer low-interest loans to low-income customers.

Banks like the privately owned Lemon Bank in São Paulo that operates exclusively through automated teller machines in outlets like bakeries and corner stores, are more interested in providing basic financial services than in offering credit. "There's a lot of romanticizing about credit," said Michael Esrubilsky, Lemon Bank's general manger. "What our client really needs is convenience to pay bills, to not have to spend an hour to get to the nearest bank and to not have to spend 10 reais on transportation to get back and forth."

Smart Subsidy for Sustainable Microfinance Article 2005

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This article begins by noting that worries about the dangers of excessive subsidisation have driven microfinance conversations since the 1980s. It suggests that from this time the goal of serving the poor has been twinned with the goal of long-term financial self-sufficiency on the part of microbanks.

The starting point for the article in considering smart subsidies is recognising that the same forces driving efficient outcomes in free markets – i.e. hard budget constraints, clear bottom lines, and competitive pressure – can also be deployed in contexts with subsidies. Furthermore, it argues that if deployed well, there are circumstances in which subsidies can increase the scale of microfinance outreach, access to commercial finance, and depth of outreach to the poor. At the same time, however, the article does highlight that over reliance on subsidies and poorly designed subsidies can limit scale and undermine incentives critical to building strong institutions. The concept of a “smart subsidy” stems from the proposition that subsidies are neither inherently useful nor inherently flawed. The article states that a smart subsidy maximises social benefits while minimising distortions and poor targeting.

The article begins by setting out three reasons for an opening to broader deployments of subsidies. Firstly, it notes that use of subsidies remains an ongoing part of the financial strategies of many microfinance institutions (MFIs). Secondly, it points to the argument that subsidisation is unlikely to end soon. Finally, the article sets out a number of analytical concerns. The discussion then moves on to suggest that smart subsidies should “crowd in” funding from donors rather than “crowd out”.

The article also considers the importance of subsidies in the start-up phase, both for institutions as well as for customers. For institutions, the article presents the argument that start-up subsidies have the relative advantage of being for a limited time-period and relatively transparent, thus reducing the fear of dependency. However, the paper does also put forward the case that the notion of a “start-up” subsidy could be expanded to incorporate major expansions. From the customers perspective, the article points to the example of BRAC (in Bangladesh) subsidising potential clients, through its Income Generation for Vulnerable Group Development (IGVGD) program, who were not yet ready to borrow from microlenders at “market” interest rates.

The conclusion stresses that in general, subsidies should be time-limited and rule-bound. It also notes though that if smart subsidies are deployed in the hope of producing demonstrable social impacts, those impacts should be measured using rigorous statistical analyses.

Making rural finance count for the poor Paper 2004

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This working paper defines rural finance as encompassing all savings, lending, financing and risk minimizing opportunities (formal and informal) and related norms and institutions in rural areas. In addition, this paper identifies a significant gap in donor and government focus – the development and promotion of systems and instruments that reduce the risks inherent in much rural finance. Risks are primarily related to agriculture and arise from agricultural prices, weather and political factors, as well as the more ‘standard’ risks associated with providing financial services to poor people (such as those arising from information asymmetry and a lack of client financial service histories).

The paper also explores ways to overcome the implementation challenges that have impeded the replication of viable rural financial models. Particular attention should be paid to the role of the state and donors in promoting new systems, while governments need to maintain a stable macroeconomy, an essential factor for the development of efficient financial markets. Specific areas of attention include:

  • exploring the feasibility of financial products that combine input credit with weathe rindexed insurance and produce marketing using warehouse receipt systems
  • promoting regulatory systems that engender confidence in the role of MFIs and other non-bank financial institutions in rural savings mobilization and as channels for rural payments and transfer of remittances;
  • promoting links between the informal, semi-formal and formal sub-sectors of rural financial markets; and
  • encouraging developing country governments to reorient their support towards creating an improved policy and enabling environment for rural finance and away from more direct interventions and subsidies.

This paper examines the issues that need to be considered and/or addressed in pursuing policies to make rural finance more readily available and beneficial to the poor in developing countries. Improving rural finance systems will help to raise household incomes and reduce poverty, and will contribute to the first Millennium Development Goal (MDG) on the eradication of extreme poverty.

Microfinance Outreach to the Poorest: A Realistic Objective? Article 2004

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This article from the Asian Development Bank newsletter ‘Finance for the Poor’ identifies three camps of thought on the issue of financial services for the poorest. The different assumptions and arguments of each camp is examined to see if they are valid. The core issue is whether it is realistic to expect that microfinance services can be provided to the poorest on a sustainable and large-scale basis.

This article does give a useful overview of the problems faced in providing financial services for the poorest and makes the crucial point that financial services do not create economic opportunities; they only allow people to take advantage of economic opportunities created by other interventions. The author concludes that to reach the poorest, it is necessary to design appropriate products and innovative delivery mechanisms that can enable financial services to be provided at affordable prices. Strong institutions are also needed, together with adequate investment in social and physical infrastructure.

This is a good quotation which is cited in the article: "Credit should be a lubricant for the engine of feasible and profitable activities; if the lubricant is mistaken for the engine, the borrower may end up in a debt trap."

Financial Institutions with a “Double Bottom Line”: Implications for the Future of Microfinance Paper 2004

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This paper begins with an important clarification of data citing over 750 million savings and loan accounts in financial institutions that focus on clients that are generally below the level served by commercial banks.

The authors notes read “A correct statement of this paper’s main conclusion is that there are over 750 million accounts in various classes of financial institutions that are generally aimed at markets below the level of commercial banks, and that some substantial fraction of these institutions’ clients are probably poor or near-poor, This message is not that the task is nearly done (anyone with field experience knows this to be untrue), but rather that these institutions represent an important potential opportunity”.

The paper refers to institutions that have a “double bottom line” as those that focus to some extent on providing financial services downward from the economic level of the traditional clients of commercial banks. As well as a financial objective, they also have a developmental or social objective. The paper suggests that the managers of these institutions would class the latter objective as primary and that sound financial performance was there to merely enable the institutions to achieve this. This paper refers to these institutions as “alternative financial institutions” (AFIs). Specialised MFIs are distinguished from other AFIs by the reasoning that they tend to be more specifically focused on the poor and near-poor, not just the unbanked.

The research reported in this paper suggests that specialised MFIs account for a relatively small proportion of the total savings and loan services delivered by AFIs. It argues that while governments, donors, and other interested in the outreach of microfinance should continue to foster the growth of high-performing MFIs, these stakeholders also need to think about the opportunities and challenges presented by the other AFIs. Yet despite their vast outreach, the paper notes that AFIs probably serve only a minority of the unbanked clientele they were created for, and many suffer significant limitations.

This paper reports the results of the CGAP survey of the global outreach of AFIs, then discusses in more details the characteristics of the types of institutions that were surveyed, and finally suggests some strategic implications for those who want to help develop financial systems that work for poor people. The annex discusses methodology, as well as some key limitations of the data used.

Comments on Microcredit for the Poor Paper 2004

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This short paper identifies one of the problems of micro credit – that of repayment. The author points out that many development banks and projects failed because they could not secure repayment of credit that clients had received. He connects this to a failure of the “essential triangle of production” which suggests that unless each side of the triangle – representing credit, input supply and marketing – is completed, repayment will be difficult. The author points out that traditional money-lenders can usually ensure repayment as they often provide one or even both of the other sides of the triangle, whereas financial institutions, occupying only one side, cannot.

The paper argues that co-operatives can overcome this problem, so long as they retain the classic co-operative principles. A member-owned cooperative can provide the three elements of the triangle in the best interests of the members. The author then focuses on savings and credit cooperatives and argues that unless they follow correct methods of calculation on interest to be paid on member deposits and charged on member loans, the members are not receiving the best possible service and, in consequence, may fail. He believes member education is, therefore, crucial.

Finally this paper addresses the issue of rural development and microcredit and suggests that raising the productivity of farmers is insufficient to redress rural poverty. The creation of non-agricultural employment is also important and credit is needed for non-farm enterprises.

Microfinance Development: Can Impact on Poverty and Food Insecurity Be Improved Upon? Paper 2004

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Development strategies aimed at eradicating poverty now invariably incorporate microfinance as one of the key elements. Thanks to this increased attention and the quantity of resources being devoted to it, the outreach of microfinance is expanding very rapidly, despite the fact that the services are still largely using a one-fits-all modality across all areas and economic situations. Experience strongly suggests that microfinance indeed has the potential to be one of the key instruments to fight poverty by positively affecting the house-hold economic portfolio. It can expand opportunities for enhancing income, improve capabilities in terms of human capital, improve the copping mechanism against vulnerability in its various features, as well as empower the disadvantaged; and the impact can occur at enterprise, individual, household and even community level, largely as a result of enterprise profitability.

Yet, the available evidence in Ethiopia suggests little progress has been made. According to the author microfinance is still largely financing agricultural activities, little served with modern technology, and very few non-agricultural activities apart from trading. Individual enterprises are expanding very slowly, if at all. After being long time clients of the MFI, and after taking 8-9 consecutive loan cycles, the absorptive capacity and the loan size taken by an individual enterprise is hardly different from what it was when the clients joined the MFI afresh eight-nine years back. Micro-saving, which is proving elsewhere to be as important, if not more important, than microcredit services in terms of guarding the poor against vulnerability, seems to be given little accord, even by the microfinance service providers themselves. The number of voluntary savers in the Amhara region is quoted as being 80,000 which is a very small proportion of the rural population of 3 million households.

The author believes that women are not enjoying the full benefit of microfinance services although they primarily target them. The programmes are implicitly or explicitly based on the assumption that rural women are conversant with non-farm income-generating activities and have sufficient time to expand traditional or start new ones, which is clearly often not the case. Many loans given to women are actually utilized by men. The author concludes that microfinance is not a sufficient instrument for reducing poverty in areas like that of the Amhara region. For it to be effective, the marketing situation, the infrastructure, particularly the road net-work, the skill and risk aversion behaviour, particularly that of women, and integration of the whole service with other sectors requires immediate attention.

The Prevention of Debt Bondage with Microfinance-led Services Paper 2003

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This paper, from the Social Finance Programme of the International Labour Organisation, discusses the early findings of an initiative by the ILO to look into the problem of debt bondage in South Asia, in which millions of the poorest and most vulnerable workers are bonded to their employers as they strive, often in vain, to repay loans. The root causes of this bondage include interlinked and monopolistic labour and credit markets, deeply entrenched social exclusion, and workers’ lack of information particularly regarding their legal rights.

The paper begins with a section detailing the definition, causes, and manifestations of debt-bonded labour in South Asia (Bangladesh, India, Nepal, and Pakistan). Such bondage is the combination of a credit and a labour contract in which the value of labour services as reasonably assessed is not applied toward the liquidation of the debt (only interest is repaid by the labour, not the principal), or involves work activities that are neither defined nor limited. Debt bondage is caused in many cases by loans taken in response to an emergency, such as paying medical bills, buying food, or burying a family member. In South Asia these loans can lead to debt bondage due to special conditions. For instance, families who experience social exclusion because of religion, ethnicity, or caste are significantly more vulnerable to labour exploitation and debt bondage than other economically poor families. Illiteracy helps to withhold information about workers’ rights. Moreover, labour bondage often takes place where the loan giver is also the only local employer: this monopoly means the worker can often receive very disadvantageous terms for a loan. The employer/loan giver is also, often a person of local importance, sometimes with a role in the political, judicial, or police system, which also impedes the worker from finding and exercising his rights. Often the employer/loan giver offers remuneration in in-kind payments of food, shelter, etc., which promotes dependency. Microfinance institutions (MFIs) are generally not set up to release labourers in debt bondage, because such bondage is illegal and an MFI loan might serve to prop up the quasi-feudal system of debt bondage that it would be intending to eliminate. However, as many MFIs are not always aware of the true condition of indebtedness of clients, loans may in practice be being provided to help the poorest escape such bondage.

The second section looks at methods of preventing debt bondage. The ILO has joined with multipurpose non-governmental organisations (NGOs) to develop and deliver a package of services designed to prevent debt bondage. The project employs a microfinance-led approach addressing the causes of bonded labour. Since an interlinkage between credit and labour markets is a primary cause of debt bondage, the project seeks to provide access to appropriate financial services as a prevention strategy. Microfinance alone is not sufficient to protect the poorest, but the project also encourages a group-based savings and credit delivery mechanism which aids social and economic empowerment. As well as providing these services, the project seeks to improve education and literacy, skill training, and health.

The third section looks at the results of this project after two years of full operation. In general it has proven more difficult to rehabilitate workers emerging from debt bondage than to work with families vulnerable to debt bondage but not yet trapped in it. Those who emerge from debt bondage have little initiative, more dependence, less self-confidence, and a difficulty trusting outsiders. The project has focused on identifying families vulnerable to debt bondage, using a survey index assessing families’ basic literacy and poverty levels, health expenses and vulnerability to economic shocks, and other factors, and targets its efforts on the families rated most vulnerable. Such families are encouraged to form savings and credit groups which will help to stabilise members’ economic and social standing, providing education and legal information to which they would not otherwise have easy access. The project has also, in some cases, begun a dialogue with potentially abusive employers, reasoning that this tactic would likely be more productive and generally beneficial than applying punitive legal measures.

The fourth and final section looks at lessons that the project can teach about microfinance. One such lesson is that microfinance is not the unique solution to debt bondage, and indeed cannot succeed in freeing the bonded for long without social structures in place to support the freed workers. Four core financial services should be offered: income-generating loans, emergency loans, contractual savings (in which clients are required to make a certain deposit amount in a given period), and liquid savings, though this latter may be problematic in a savings and credit group formed of the poorest members of society, all of whom may be anxious not to let others know how much money they have, or that their savings might all be lost in an unpaid loan. Clients abused by debt bondage may require more sensitivity in the area of debt collection, and the authors encourage the use of incentives like cash-back programmes as a reward for prompt repayment. Financial services should emphasise savings over credit.

The most innovative suggestions come on pp 27-29, where the authors discuss the special ways of dealing with debt repayment for rehabilitated former sufferers of debt bondage, but this whole paper advocates a humane and thoughtful method of assisting these vulnerable people out of an intolerable condition.

Author Daru, P; Churchill, C.; Beemsterboer, E.
Publisher ILO
Number of Pages 32 pp.
Primary Language English (en)
Region / Country Global
Keywords Bonded Labour, Agricultural Microfinance
Related Resources
Banking on the Poor: Unleashing the Benefits of Microfinance Paper 2002

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This policy brief is designed to help policymakers and practitioners understand the financial services needed by the poor. It is framed within lessons learned from a five-year IFPRI research program that examined, among other issues, the roles government should play in providing financial services to meet the needs of the poor. Insights presented here are based on a series of detailed household surveys conducted in nine countries of Africa and Asia: Bangladesh, Cameroon, China, Egypt, Ghana, Madagascar, Malawi, Nepal, and Pakistan.

Microfinance, once a colossal leap of faith for many governments and donors, is now considered a viable business. IFPRI’s research shows that it is most successful when designed with a tight and mutually reinforcing fit between the larger financial environment, the mechanism of service design and delivery, and the particular needs of the poor that microfinance institutions serve.

Author IFPRI
Publisher IFPRI
Number of Pages 6 pp.
Primary Language English (en)
Region / Country Global
Keywords Policy Environment, Policy Makers, Financial Services, Government Policy
Related Resources
Informal markets: What lessons can we learn from them? Document 2000

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This policy brief examines the various informal markets that the rural poor have traditionally turned to for their financial needs. For example:

  • Lending and Borrowing among relatives, neighbours and friends
  • The rotating credit and saving associations (ROSCAs)
  • Informal moneylenders
  • Tied credit

Important lessons to be learned from the informal sector include:

  • Building credible long-term partnerships
  • Tailoring financial services to specific demand patterns
  • Knowledge of local economy is important; therefore, so is decentralisation of decision-making
  • Not all financial contracts are self-enforcing and adequate steps must be taken to enforce contract compliance
Finance Against Poverty Volume 2 Book 1996 English (en)

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More than one billion people around the world live in poverty; most of them live in developing countries. The idea that these people might improve their living standards by becoming micro-entrepreneurs – and that financial institutions should support their initiative with small loans – has found many supporters over the last decade.

This book, Finance Against Poverty, examines this theory and reviews the practical results in seven countries. It is published in two volumes:

  • Volume 1 offers an in-depth analysis of the theory and practice of microfinance, as well as policy recommendations for practitioners in the field.
  • Volume 2 presents the empirical evidence from seven developing countries: Bangladesh, Bolivia, Indonesia, Kenya, Malawi and Sri Lanka.

Both volumes provide a wealth of information and research on the impacts of savings and credit on productivity, employment, poverty levels and socio-political relations. With its detailed assessment of both the benefits and limitations of financial intervention, Finance Against Poverty is an important text for those studying development, poverty reduction, social welfare and finance.

Volume 2 contains the following case studies:

  1. Metamorphosis from NGO to commercial bank - the case of BancoSol in Bolivia
  2. Indonesia - BKK, KURK and the BRI unit desa institutions
  3. Credit for the poor in Bangladesh - the BRAC rural development programme and the Government Thana resource development and employment programme
  4. Mutual finance and the poor - a study of the Federation of Thrift and Credit Cooperatives (SANASA) in Sri Lanka
  5. India - the regional rural banks
  6. Financing the Jua Kali sector in Kenya - the KREP Juhudi scheme and Kenya Industrial Estates informal sector programme
  7. Rural and agricultural credit in Malawi - a study of the Malawi Mudzi Fund and the Smallholder Agricultural Credit Administration

On the basis of their analysis, the authors conclude:

  • that market interest rates, intensive loan collection by mobile bankers, savings and insurance facilities and incentives to repay, all had a valuable role to play in most environments, including individual and group-based schemes
  • that most schemes had positive effects on incomes and poverty and indirect positive effects on other financial providers working with the poor, but little effect on employment and technology
  • that a trade-off exists between the income impact and poverty impact of schemes; a trade-off which could be moved by improving institutions' financial performance, lower their transaction costs or remove the demand constraints to which borrowers are subject
  • that in the light of the above, a case existed for temporary, performance-related subsidies to innovative credit institutions and for such institutions to offer emergency consumption loans
www.routledge.com  -  English (en)

Finance Against Poverty Volume 1 Book 1996 English (en)

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This resource appears in: Banking for the poor

More than one billion people around the world live in poverty; most of them live in developing countries. The idea that these people might improve their living standards by becoming micro-entrepreneurs – and that financial institutions should support their initiative with small loans – has found many supporters over the last decade.

This book, Finance Against Poverty, examines this theory and reviews the practical results in seven countries. It is published in two volumes:

  • Volume 1 offers an in-depth analysis of the theory and practice of microfinance, as well as policy recommendations for practitioners in the field.
  • Volume 2 presents the empirical evidence from seven developing countries: Bangladesh, Bolivia, Indonesia, Kenya, Malawi and Sri Lanka.

Both volumes provide a wealth of information and research on the impacts of savings and credit on productivity, employment, poverty levels and socio-political relations.

With its detailed assessment of both the benefits and limitations of financial intervention, Finance Against Poverty is an important text for those studying development, poverty reduction, social welfare and finance. It tackles the controversies about intervention in the financial market – when and where is it justified? What kind of intervention – direct intervention, subsidy, regulation or what?

Volume 1 covers the following topics:

  1. Why development finance institutions exist: market failure versus government failure
  2. Financial performance and sustainability: an economist’s analysis (not for the non-mathematical)
  3. The impact on production and technology
  4. Finance for the poor: impacts on poverty, vulnerability and deprivation
  5. The politics of financial intermediation for the poor
  6. The management of financial institutions for the poor
  7. Growth versus equity?

Broadly speaking, the authors conclude that if credit is compared with the other potential weapons against rural poverty - social safety nets, employment generation programmes, investment in primary health and education - credit is the only one which places a tangible capital asset in the hands of the poor; and equipment investment is still, in both rich and poor countries, the key to development. The caveats for regarding credit as an anti-poverty instrument are that, first, it must be properly administered and, second, profitable projects must exist. This latter condition is heavily influenced by government policy.

www.routledge.com  -  English (en)

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