Advocates suggest that over 150 million poor people are served by microfinance. Yet 2.5 billion adults still lack access to formal financial products. The “microfinance revolution” was built on the idea that small loans to small-scale entrepreneurs can generate huge returns. Three decades of experience is now pointing to broader opportunities and also to re-assessments of early visions. Research is providing independent analysis aimed at imagining the next generation of “inclusive finance.” Specifically, researchers and practitioners are rethinking assumptions and collecting new data as they work toward filling the gap. Advocates have driven the microfinance movement by working to create social change and to expand markets. Successes are due, in part, to the use of nontraditional approaches, including mechanisms built on groups, trust, and “social collateral”. But research is showing that the story is more complicated – and more interesting. Other key factors entail attention to factors including individualized incentives, psychological self-control issues, gender inequalities, and management innovations. The original microfinance product—microcredit for “microenterprise”—has given way to a range of financial products, including saving and insurance. By the end of 2009, for example, the pioneering Grameen Bank took in $1.40 in deposits for every $1 the bank lent. Evidence on the financial lives of the poor suggests that useful products are convenient, flexible, and reliable. The evidence also suggests that credit can be as important for addressing risk and the ups and downs of income as it is for starting and growing businesses. Behavioral economics combines perspectives from psychology and economics, and new studies are helping to explain why and how financial mechanisms work – and helping microfinance institutions design better products. Commitment devices, for example, are helping people to save by providing structures that overcome the temptation to consume more today. A study from the Philippines shows that customers using savings accounts with commitment devices were able to increase their saving by 85%. Branchless banking is a recent development with potential to change the way financial services are used and delivered. Innovations like rural automated teller machines and delivery channels using mobile phones can be a cost-effective way for institutions to broaden their outreach. Given the different directions in which advocates have taken microfinance, frank assessments of the roles of subsidy and markets in creating institutions that work for the poor matter more than ever.
Key Readings: Morduch, Jonathan, and Stuart Rutherford. 2003. “Microfinance: Analytical Issues for India.” |
