The Poor and Their Money: What Have We Learned?

What are the obstacles to better access by the poor to finance in these markets and how can governments and aid agencies intervene to improve matters? It is this question that the current paper seeks to address. The paper lays out some of the main challenges currently facing development agencies in this field:

• Group borrowing and joint liability can have costs for borrowers in terms of peer pressure, loss of trust, and the likelihood that the poorest and most vulnerable will remain excluded;
• The true costs of taking part in these schemes need to be measured when assessing the net benefit to poor borrowers;
• Targeting the poor by means of self-selection and incentive mechanisms has certain advantages and disadvantages compared with direct targeting, so a combination of strategies may be more effective;
• Funds for consumption to tide people over vulnerable spells can help reduce impoverishment in the long run;
• To be effective, MFIs must provide a wider range of services and more flexible contracts;
• Greater responsiveness to poor people's needs has the potential to increase impact and achieve sustainability;
• Governments and donors have learned that subsidising the management of the MFIs is more effective than subsidising interest rates for the poor but despite plans for a massive increase in the scale of microfinance it is unknown whether government and donor subsidies to MFIs might be more effectively used to help the poor in other ways.

Although the paper concludes that the donor community can still have a role in supporting some MFIs it states that:

• At present, too little is known to permit effective comparisons between microfinance interventions and the main alternatives in poverty reduction;
• The lack of comprehensive cost-benefit estimates makes it difficult to compare alternative ways to intevene and design policies;
• A possible solution to this problem lies in designing interventions as policy experiments, or as learning processes;
• Programmes designed for microfinance purposes would run in parallel with programmes directed towards geographically isolated people and the very poor;
• Effective monitoring of what happens to poor people's livelihoods in this twin-track approach may well provide a ready counterfactual analysis.