The Paradigm Shift in Microfinance: A Perspective from HIID

Drawing on work in Asia, Africa and Latin America, this paper analyses the paradigm shift in microfinance from government and donor- funded subsidised credit to sustainable financial intermediation.

The author posits that institutional microfinance is characterised worldwide by what has been called the 'absurd gap' between demand and institutional supply. Delves into the reasons and explanations.

The paper concludes with policy implications for governments, donor agencies, banks, and NGOs:

• For microfinance to be successful, governments should control inflation and establish appropriate regulations that permit institutions to charge the interest rates and fees needed to cover all costs and return profits;
• Governments should also provide effective and appropriate supervision of institutions supplying microfinance and educate the bureaucracy and public about microfinance and its importance for economic development;
• Donors should fund and implement microfinance separately and differently instead of combining it with social services programmes such as health, nutrition, family planning, literacy and training;
• Donors can also help the emergence of commercial microfinance through the use of grants and concessional loans to fund the start-up equity required by a few selected institutions that are qualified and committed to attaining full self-sufficiency.

[Adapted from author]