(July 11, 2007) During the past 25 years, the microfinance movement has challenged conventional financial sector and government thinking, in the process fundamentally altering the financial landscape. Today, it provides most of the access to financial services available to low-income people in South Asia, but it is still largely a separate part of the financial system.
Facts: - In South Asia, the modern microfinance was born in Bangladesh in the 1970s. - Microfinance movement in South Asia has permanently changed the face of the financial sector. - South Asia has almost every conceivable type of microfinance activity. - Women in South Asia are the majority client for Microfinance. - Microfinance is a key part of the global strategy to meet the MDGs. - Microfinance outreach is only 17 percent of the poor families in South Asia.
In South Asia, the modern microfinance movement was born in Bangladesh in the 1970s as a response to the prevailing poverty conditions among its vast rural population. Astonishing growth rates in Bangladesh, particularly during the 1990s, created a new dimension for microfinance worldwide as microfinance institutions grew to include millions of clients. For the first time, a substantial proportion of the low-income families of a major developing country were served by the activity. The start of the twenty-first century reinforced this trend as the Bangladesh numbers continued to grow impressively; in India, a substantial microfinance system based on self-help groups (SHGs) developed. Other countries of the region made slower and later starts but have since established active microfinance sectors.
Chapter 1: The Financial Landscape and the Emergence of Microfinace
The paper argues that microfinance developed in South Asia under very different ideological, political, and economic conditions than in Latin America. The difference can be illustrated by a brief comparison of two of the most famous and influential microfinance institutions (MFIs): Grameen Bank of Bangladesh and Banco Sol of Bolivia. Modern microfinance was born in Bangladesh in the 1970s, in the aftermath of the country's war of independence, when Professor Muhammad Yunus began an experimental research project providing credit to the rural poor, an experiment that was driven by a strong sense of developmental idealism. In contrast, a collapsing populist regime in Bolivia led to widespread unemployment, and Banco Sol was created to address the problem of urban unemployment and provide credit to the cash-strapped informal sector.
Many of these differences still characterize the industry and the microfinance discourse in the two regions today. South Asian microfinance is primarily focused on poverty alleviation, while Latin American microfinance is more oriented toward the inclusion of micro entrepreneurs in the financial system.
The microfinance movement in South Asia has permanently changed the face of the financial sector by challenging conventional thinking and introducing innovations. The limits of the microfinance model emerge, however, when it comes to serving many more poor people who are still excluded and capturing a larger share of he financial service business of the existing clientele.
Chapter 3: Institutional Structures and Delivery Systems
Given the early establishment and deep roots of the cooperative movement in South Asia, it is perhaps not surprising that Community Based Organizations (CBOs)-including cooperatives-are an important pillar of microfinance in the region. Together with the ubiquitous NGO-MFI, such organizations form the delivery interface for virtually all the recorded outreach of financial services available to low-income clients in the region. Only a small amount of additional microfinance outreach is provided by the retail operations of development and commercial banks, the activities of post office banks, and, to an even lesser (but growing) extent, by insurance companies. Despite the importance of CBOs as a delivery mechanism in the microfinance landscape, diverse links provide microfinance services to clients and delivery systems vary, meaning that South Asia has almost every conceivable type of microfinance activity.
Microfinance Institutions (MFIs) essentially perform the role of intermediating financial resources and services between (1) investors, banks, donors, and depositors, and (2) the poor. This section looks at the financing structures of MFIs in South Asia and discusses the issues and challenges with regard to financing that arise in ach country in the region. The underlying premise of this discussion is hat improving the quality and quantity of financial services to he poor is the goal of microfinance and, for his goal to be attained, MFIs need to e financially sustainable institutions.
Microfinance is often used interchangeably with “micro-credit.” However, it is now well understood that the poor (or low-income families) normally classified as the target clients of microfinance need, and use, more financial services than just micro-loans. Therefore, it is advisable to use “microfinance” to more accurately describe financial services of any sort provided in very small (micro-) amounts.
Chapter 4: Strategies for Growth: Assessment of Options
This chapter focuses on assessing the effectiveness of microfinance institutions in providing services to low-income clients. The effectiveness can be seen from a number of angles. These include the following: (1) breadth of outreach-the extent to which low income families are able to obtain financial services, (2) depth of coverage-the extent to which coverage actually reaches the poor and poorest sections of the population, (3) the scope and quality of services offered by providers-the extent to which they are able to provide appropriate types of services and whether the needs of clients are met, and (4) sustainability-the longevity of financial services provision to low-income clients as determined by the sustainability of institutions providing such services.
Microfinance is promoted as a service that has the potential to make a significant impact on the reduction of poverty in all its dimensions. Given the fact that women are the majority client, microfinance can promote women's empowerment in a context in which men usually are the financial agents. These aspects relate to poverty reduction, understood not only in terms of income or expenditure levels, but also in terms of social dimensions, reduced vulnerability, and new opportunities. They also relate to the Millennium Development Goals (MDGs), thus microfinance is often cited as a key part of the global strategy to meet the MDGs. This chapter presents the evidence for such impact, briefly discusses some drawbacks in research methodology to measure impact, and considers recent trends in the approach to impact assessment and social performance assessment.
As discussed in chapter 1, microfinance in South Asia grew out of a concern for poverty and a desire to provide the poor with the means to accumulate assets. Yet, after nearly 30 years of a gradually growing but lately intensive effort, microfinance outreach is only 17 percent of the poor families in the region. While this outreach level is high in a couple of countries, the overall performance is undoubtedly low. It is apparent that to make microfinance more effective, and to increase its outreach in increasing incomes of poor families (or at least providing them with relief), microfinance must have an effective set of support structures and systems.
Microfinance in South Asia gathered considerable momentum over the past 25 years. The microfinance movement challenged conventional financial sector and government thinking, in the process of fundamentally altering the financial landscape in favor of the poor. A growing microfinance sector with an increasingly wide range of products and more sophisticated support structures have improved access to financial services for many people previously excluded from the system. This has occurred largely through the creation of an alternative financial system, a parallel world of financial instruments and support mechanisms with tenuous links to the “mainstream world” of sophisticated financial markets.
While the emerging financial landscape is more inclusive than before, microfinance clients and practitioners are still largely regarded by the formal economy as a curiosity than a real business opportunity.
Development Data A wide range of social and economic measures on South Asia, including links to the World Bank's most important online development databases.
Analysis and Research Compilation of all the World Bank's publications on South Asia, with 'search' options and links to analysis and research on other South Asian countries.
World Bank Program in South Asia Launching pad to all information on World Bank activities in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
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