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Institute of Development Studies (IDS)

Microfinance impact and the MDGs: The challenge of scaling-up

Working paper 255

Martin Greeley

Institute of Development Studies (IDS)

March 2006

SARPN acknowledges the IDS website http://www.ntd.co.uk/idsbookshop/details.asp?id=912 as the source of the document.
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Summary

This paper concerns the potential for microfinance to make a difference in achievement of the Millennium Development Goals. It recognises that microfinance can contribute to several MDGs but that to do so in ways that make a real difference would involve a significant scaling-up of microfinance service provision. Herein lies the challenge. The expansion of developing country microfinance services is increasingly driven by commercial investors who do not usually assess Microfinance Institution (MFI) performance according to MDG criteria. At best, they will use some fairly loose ‘social’ criteria often borrowed from the corporate social responsibility literature; or they may refer, usually without precision, to a double bottom line of financial and social performance. These have little or nothing to do with achievement of the MDGs. As the empirical material presented makes clear, MFIs that do not deliberately and rigorously target poor households are unlikely to make any difference to MDG attainment. MFIs with a social mission focused on poverty reduction (MDG1) face a genuine difficulty. To expand coverage of poor households, they generally need to seek financial support, usually in the form of loans or equity. Their difficulty is that they face a serious risk of ‘mission drift’, concentrating on achieving an outstanding financial performance, which is necessary anyway and especially if they wish to access commercial funds, and neglecting their social mission. In other words, commercial funding may mean less attention to poor households in microfinance service delivery. The challenge for the industry is to manage scaling-up without losing sight of its social purposes. The paper argues for client-level assessment by MFIs that can both ensure that poor households are targeted and that microfinance impact on their poverty status can be monitored. Developing a social performance monitoring system based on client assessment is the principal way in which MFI impact on the MDGs can be established and maintained.

Introduction

The context for this paper is twofold. First, the belief, a very reasonable one, that microfinance has the potential to help achieve the MDGs. Secondly, the knowledge that to realise this potential in a meaningful way requires a substantial scaling up of microfinance service provision.

This is the global context. South Asia provides most of the evidence and most of the client numbers that inform debate on MDG impact. South Asia has had a high growth rate in client numbers and has high growth potential. Elsewhere also there has been sustained growth, through a variety of institutional models. Context has a strong effect on both MDG impact potential and growth potential but, in different contexts, Microfinance Institutions (MFIs) have demonstrated that they can deliver sustainable services that contribute to the achievement of the MDGs.

This evidence has been reviewed elsewhere and is only discussed briefly here. In this paper the focus is more on the challenges of improving the evidence base. The point here is that, relative to the scale of MFI service provision, we know relatively little in a reliable form about the social and economic impacts of MFIs. The second part of the paper then relates this to the challenges of scaling up in ways that encourage achievement of the MDGs. It argues that both for the achievement of the MDGs and for sustainable scaling up, collecting, managing and using knowledge about clients are core organisational strategies for MFIs.

The paper draws in part on the work of 30 MFIs who have been partners in the Ford Foundation-funded Imp-Act action research programme. CYSD, SHARE and PRADAN from India were all very active participants. Although that global programme did not specifically address the MDGs, the focus of the programme findings, on the need, and means, to strengthen MFI social performance management, is underlined through the arguments here. In summary there are two arguments. First, we do not know enough at present to assess the contribution of MFI programmes to the MDGs. Secondly, MFI success in providing sustained financial services derives from their style of financial intermediation, specifically from the management of transactions costs. To be sustainable, scaling up has to preserve the character and value of these forms of intermediation. The arguments point to the requirements for knowledge about clients; knowledge is needed both about their socio-economic condition on joining and on how that changes as a consequence of their membership in an MFI. These needs can be met through systematic Social Performance Management.



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