Maximizing the Outreach of Microenterprise Finance: The Emerging Lessons of Successful Programs

October, 1995     James Fox

The conventional view has held that microenterprise finance helps poor people and therefore is a desirable development activity but that it cannot be financially viable. Small loans, it is said, are simply too costly to administer, and the profits from such lending too meager to permit profitability. However, a study examining some of the best microfinance institutions concludes that this conventional wisdom is quite wrong. Microfinance institutions can and indeed need to be self-sustaining if they are to achieve their outreach potential providing rapid growth in access to financial services by poor people.

Past efforts using subsidized and directed credit have left a distressing legacy of failed programs and created many skeptics. The weaknesses of past efforts to reach small farmers and other priority groups have been in three main areas: lending institutions have not been financially self-sufficient and usually became decapitalized quickly; funds have not reached the intended target group; and programs have distorted financial markets in ways that interfered with the efficient evolution of finance for broad sectors of the economy.

The recent performance of “frontier” microenterprise finance programs demonstrates that some learning has taken place from the mistakes of subsidized directed credit. Programs are increasingly charging interest rates and fees that cover the real cost of delivering financial services and are embracing financial self-sufficiency as a primary organizational goal. More and more institutions have crossed major hurdles in terms of outreach, raising resources on commercial markets, and increasing service to difficult-to-reach populations.

Read entire publication