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

This paper states that financing microenterprises using subsidized and directed credit has not been viable. The approach has the following weaknesses:

• Lending institutions are not financially self-sufficient and usually become de-capitalized quickly;
• Funds do not reach the intended target group;
• Programs distort financial markets; this inhibits the efficient evolution of microfinance.

Further, the paper analyzes the performance of "frontier" microenterprise finance programs from two perspectives: outreach and financial sustainability. Key findings of the study include:

• Scale, and not exclusive focus, determines substantial outreach to the poorest;
• Key to rapid growth is the ability to maintain financial viability by:
  • Controlling bad loans;
  • Holding administrative costs at manageable levels;
  • Developing a rapidly growing base of financial resources.
• Service quality should be tailored to the situation of micro-entrepreneurs.

The paper concludes with recommendations to donor agencies that are looking at funding such programs:

• Exhibiting management commitment to achieve financial viability within a reasonable period with concrete targets and credible plans;
• Promoting the use of standard accounting practices, including transparent treatment of subsidy and portfolio quality (delinquency);
• Exercising caution in promoting savings mobilization to ensure financial capability of institutions to manage clients' resources prudently.