The microfinance industry is now in its third decade of growth. It is a substantial component of development efforts in most developing countries and also now in Central and Eastern Europe and the Newly Independent States (Forster et al. 2003) where it is expanding rapidly.
During this growth period there has been ever-increasing attention to the modalities through which microfinance service provision seeks to contribute to the achievement of development objectives. Two routes receive most attention. The first is the contribution to poverty reduction through ensuring service delivery to poor households that have the capacity to strengthen their livelihoods, but have lacked the financial resources to realise that potential. This does not usually mean an exclusive focus on targeting households that are poor, though it may, but it does mean active programming to ensure inclusion of the poor. The second is the contribution to the establishment of functional financial markets, particularly in rural areas for households that were previously without proper access to financial services. To simplify, we can refer to the former as the poverty route and the latter as the market route. The core issue facing the industry today is how microfinance organisations (MFOs) can combine these routes. Few within the industry would disagree that both are desirable but the poverty route, through targeting and organisational learning to improve poverty outreach, has financial costs and there is a trade-off between the two courses. Quantifying these costs and the associated welfare benefits is a key industry challenge.
Most MFOs have a mission commitment to the poverty route. However, they are facing increasing pressure to perform as well on the market route. The pressure is threefold: first, they need to grow in order to achieve a scale of outreach that makes a significant difference to poverty; secondly, only through growing will they achieve the operational scale economies that allow them to be financially sustainable; thirdly, donor money is limited and to grow they need to access commercial funds. The very fact of this pressure of course encourages survival-minded MFOs to pay more attention to the market route.
At present we only have agreed indicators that measure performance on the market route. Through services such as the Microbanking Bulletin and rating systems such as GIRAFE and CAMEL, the quality, i.e. the commercial viability, of an MFO portfolio can be assessed. On the poverty route, relatively few MFOs (Sebstad and Cohen 2000) can convincingly demonstrate their poverty-reduction performance through gathering information on household-level selection for, and then impact of, service provision. However, there is a growing commitment to correct this. Some MFOs, including Imp-Act partners, are monitoring both selection and impact. Their experience provides the basis for establishing industry standards on poverty reduction performance. Crucially, such standards must incorporate two central concerns: a measurable and comparable concept of poverty and a clear understanding of how the operational context imposes trade-off costs between market performance and poverty performance.
The adoption of poverty performance standards is necessary if donors and other “double bottom line” investors are to be confident of fulfilling their mandate on poverty reduction. Performance against such standards should be not assessed as a “pass or fail”. Experience shows that MFOs which are able to perform on the poverty route and be credible with their performance on the market route have gone through a process of learning. The MFOs describing their experience in this section of the Bulletin are examples of this learning in very different contexts. Building on such experience, assessment should be based both on performance and on evidence of an organisational culture that promotes improving practice responsive to information about context and clients. This agenda can identify what Zeller and Meyer (2002: 377) refer to as ‘public goods… institutional prototypes for specific socioeconomic and agroecological settings that can be replicated and adapted by other financial institutions’.
Related Content
This article comes from the IDS Bulletin 34.4 (2003) Part I: Microfinance and Poverty 1. Poverty Reduction and Microfinance – Assessing Performance