Microfinance and Public Policy: Outreach, Performance and Efficiency

The goal of microfinance institutions (MFIs) is to help the poor cope better with risk, take advantage of small income-generating opportunities, and empower themselves through organization. To have this impact, MFIs need to be financially sound and sustainable. However, while there may be situations where MFIs can meet both of these objectives, there are other markets where it is very difficult or even impossible for an institution to break even, no matter how efficiently it operates. This is particularly the case in rural, remote, and sparsely populated areas. This volume argues that public policy on MFIs should take into account the variety of market and contextual constraints. Governing policies should be guided by efficiency—an overarching criterion accommodating different combinations of financial performance and social impact. This volume examines the concept of efficiency in financial intermediation, how it is measured, and how public policy can be geared to provide incentives to efficiency gains. The argument is illustrated by an empirical analysis of 45 MFIs from around the world.

Bernd Balkenhol is director of the Social Finance program at the International Labor Office.