This paper puts a corporate finance lens on microfinance. Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital.
April 2011
By Jonathan Conning and Jonathan Morduch
Microfinance and Social Investment
This paper puts a corporate finance lens on microfinance. Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital.
Emergencies can derail families and prevent them from getting ahead. This study describes the design, implementation, and results of a pilot emergency (“hand”) loan product in India. The product achieved its original intent, but the pilot encountered considerable institutional and execution challenges. The experience generated lessons for future product innovation.
March 2011
By FAI, ideas42 at Harvard University, and International Finance Corporation at the World Bank
Emergency (Hand) Loan
Emergencies can derail families and prevent them from getting ahead. This study describes the design, implementation, and results of a pilot emergency (“hand”) loan product in India. The product achieved its original intent, but the pilot encountered considerable institutional and execution challenges. The experience generated lessons for future product innovation.
Answering surveys is usually voluntary, yet much of our knowledge about microfinance depends on the willingness of households and institutions to respond to survey questions. In this study, Financial Access Initiative Managing Director Jonathan Morduch and Jonathan Bauchet explore the implications of voluntary reporting on knowledge about the performance of microfinance institutions, specifically focusing on the MixMarket and Microcredit Summit Campaign databases. They show patterns of systematic biases in microfinance institutions’ choices about which survey to respond to and which specific indicators to report. These patterns in turn affect analyses of key questions on trade-offs between financial and social goals in microfinance. The results highlight the conditional nature of our knowledge and the value of supporting social reporting.
June 2010
By Jonathan Bauchet and Jonathan Morduch
Selective Knowledge: Reporting Bias in Microfinance Data
Answering surveys is usually voluntary, yet much of our knowledge about microfinance depends on the willingness of households and institutions to respond to survey questions. In this study, Financial Access Initiative Managing Director Jonathan Morduch and Jonathan Bauchet explore the implications of voluntary reporting on knowledge about the performance of microfinance institutions, specifically focusing on the MixMarket and Microcredit Summit Campaign databases. They show patterns of systematic biases in microfinance institutions’ choices about which survey to respond to and which specific indicators to report. These patterns in turn affect analyses of key questions on trade-offs between financial and social goals in microfinance. The results highlight the conditional nature of our knowledge and the value of supporting social reporting.
We describe important trade-offs that microfinance practitioners, donors, and regulators navigate. Drawing evidence from large, global surveys of microfinance institutions, we find a basic tension between meeting social goals and maximizing financial performance. For example, non-profit microfinance institutions make far smaller loans on average and serve more women as a fraction of customers than do commercialized microfinance banks, but their costs per dollar lent are also much higher. Potential trade-offs therefore arise when selecting contracting mechanisms, level of commercialization, rigor of regulation, and the extent of competition. Meaningful interventions in microfinance will require making deliberate choices – and thus embracing and weighing tradeoffs carefully.
September 2009
By Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch
Microfinance Tradeoffs: Regulation, Competition, and Financing
We describe important trade-offs that microfinance practitioners, donors, and regulators navigate. Drawing evidence from large, global surveys of microfinance institutions, we find a basic tension between meeting social goals and maximizing financial performance. For example, non-profit microfinance institutions make far smaller loans on average and serve more women as a fraction of customers than do commercialized microfinance banks, but their costs per dollar lent are also much higher. Potential trade-offs therefore arise when selecting contracting mechanisms, level of commercialization, rigor of regulation, and the extent of competition. Meaningful interventions in microfinance will require making deliberate choices – and thus embracing and weighing tradeoffs carefully.
For microfinance institutions, particularly those aiming to take deposits, an advantage of regulation is that it allows semi-formal institutions to evolve more fully into banks. But complying with regulation and supervision can be costly, creating potential trade-offs. World Bank researchers Robert Cull and Asli Demirgüç-Kunt and FAI managing director Jonathan Morduch examined the balance between the benefits and costs of regulatory supervision, with a focus on institutions’ profitability and outreach to small-scale borrowers and women. The authors analyzed data on 245 of the world’s largest microfinance institutions, with newly-constructed data on their prudential supervision. Regression analysis showed that supervision does not have a significant impact on profitability: microfinance institutions subjected to more rigorous and regular super- vision are not less profitable compared to others. However, this type of supervision is associated with larger average loan sizes and less lending to women, suggesting that it does have a significant impact on outreach.
October 2008
By Robert Cull, Asli Demirguc-Kunt, and Jonathan Morduch
Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?
For microfinance institutions, particularly those aiming to take deposits, an advantage of regulation is that it allows semi-formal institutions to evolve more fully into banks. But complying with regulation and supervision can be costly, creating potential trade-offs. World Bank researchers Robert Cull and Asli Demirgüç-Kunt and FAI managing director Jonathan Morduch examined the balance between the benefits and costs of regulatory supervision, with a focus on institutions’ profitability and outreach to small-scale borrowers and women. The authors analyzed data on 245 of the world’s largest microfinance institutions, with newly-constructed data on their prudential supervision. Regression analysis showed that supervision does not have a significant impact on profitability: microfinance institutions subjected to more rigorous and regular super- vision are not less profitable compared to others. However, this type of supervision is associated with larger average loan sizes and less lending to women, suggesting that it does have a significant impact on outreach.
Microfinance institutions have proved the possibility of providing reliable banking services to poor customers. Their second aim is to do so in a commercially-viable way. We analyze the tensions and opportunities of microfinance as it embraces the market, drawing on a data set that includes 346 of the world’s leading microfinance institutions and covers nearly 18 million active borrowers. The data show remarkable successes in maintaining high rates of loan repayment, but the data also suggest that profit- maximizing investors would have limited interest in most of the institutions that are focusing on the poorest customers and women. Those institutions, as a group, charge their customers the highest fees in the sample but also face particularly high transactions costs, in part due to small transactions sizes. Innovations to overcome well-known problems of asymmetric information in financial markets were a triumph, but further innovation is needed to overcome the challenges of high costs.
May 2008
By Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch
Microfinance Meets the Market
Microfinance institutions have proved the possibility of providing reliable banking services to poor customers. Their second aim is to do so in a commercially-viable way. We analyze the tensions and opportunities of microfinance as it embraces the market, drawing on a data set that includes 346 of the world’s leading microfinance institutions and covers nearly 18 million active borrowers. The data show remarkable successes in maintaining high rates of loan repayment, but the data also suggest that profit- maximizing investors would have limited interest in most of the institutions that are focusing on the poorest customers and women. Those institutions, as a group, charge their customers the highest fees in the sample but also face particularly high transactions costs, in part due to small transactions sizes. Innovations to overcome well-known problems of asymmetric information in financial markets were a triumph, but further innovation is needed to overcome the challenges of high costs.
“Smart subsidy” might seem like a contradiction in terms to many microfinance experts. Worries about the dangers of excessive subsidization have driven microfinance conversations since the movement first gained steam in the 1980s. From then on, the goal of serving the poor has been twinned with the goal of long-term financial self-sufficiency on the part of micro banks: aiming for profitability became part of what it means to practice good microfinance.
December 2005
By Jonathan Morduch
Smart Subsidy for Sustainable Microfinance
“Smart subsidy” might seem like a contradiction in terms to many microfinance experts. Worries about the dangers of excessive subsidization have driven microfinance conversations since the movement first gained steam in the 1980s. From then on, the goal of serving the poor has been twinned with the goal of long-term financial self-sufficiency on the part of micro banks: aiming for profitability became part of what it means to practice good microfinance.
