Financial Sustainability, Targeting the Poorest, and Income Impact: Are There Trade-offs for Micro-finance Institutions?
This paper describes results of David Hulme and Paul Mosley's study, from their book Finance Against Poverty, regarding trade-offs between sustainability and poverty outreach.
Hulme and Mosley examined 13 MFIs in seven countries. The study aimed to understand the influence of the institutions' design, management and policy environments on financial sustainability and various impact measures, including poverty. The main findings are:
- MFIs are likely to produce a higher average income impact by focusing their lending on borrowers just above the poverty line;
- Some borrowers below the poverty line also achieved substantial increases in income from their loans;
- Appropriate institutional reforms to bring the MFI in line with accepted best practice design features may make it possible to increase poverty impact and increase financial viability at the same time.
The paper states that a financial product tailored to the requirements of the poor will increase their successful uptake of financial services. This could include appropriate savings facilities and small emergency loans for consumption. MFIs could charge higher interest rates on smaller loans, thus altering the incentive system that systematically works against relatively high-cost smaller loans.
