Microfinance and the Ultra Poor

December 7, 2010

A new report from the Evaluation Cooperation Group (ECG) suggests microfinance institutions are not necessarily reaching the ultra-poor.

ECG is a network of experts responsible for evaluating multilateral development banks (MDBs). Members include the African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank, International Monetary Fund and the World Bank Group, and it has relationships with numerous other international organizations and banks.

MDBs were created to provide financial support and professional advice for economic and social development activities in developing countries. And as such, they have played a critical role in the evolution of the microfinance sector.

However microfinance has changed much over the years, ECG notes, with the focus shifting towards greater commercialization in hopes of reaching greater numbers of poor.And that presents potential problems.

Here's an excerpt from the report, Making Microfinance Work: Evidence from Evaluations, which ECG released last month:

"The aid community has strongly endorsed snd encouraged the shift towards greater profitability and commercialization on the grounds that only in this model will microfinance ever reach the large numbers of as yet unserved potential poor borrowers. However, a move in this direction runs the risk of an increased concentration on the less poor, as microlenders are more likely to take out larger and hence lower-cost loans. There is also a concern that aggressive marketing of microfinance may push poor borrowers into taking high-cost loans that are not appropriate to their needs...one recent analysis found, that as group-lending MFIs get bigger, they also lend less to the poor and to women...This is a warning that even NGO MFIs may not be focusing primarily on the very poor anymore."

Copies of Making Microfinance Work are available for downloading at the ECG Web site.

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