A Market Approach to Microfinance: A Deserving Research Agenda

This paper argues that poverty can be reduced by providing employment through small and medium enterprises (SMEs). The credit for their operation should come from microfinance rather than from non-market mechanisms like NGOs and other public funding schemes.

The author recommends the creation of an enabling environment and stresses the need for further research to study the efficacy of these strategies. He observes that:

• There is a need to study the existing market based microfinance institutions (MFIs) as instruments to alleviate poverty;
• It is necessary to create the legal, regulatory and supervisory framework necessary for the working and sustainability of these market-based MFIs;
• A market-based solution is one that is capable of operating in the designated market without any subsidies;
• The growth and stability of market-based solutions depends on the severity of market failure, which can be reduced by introducing innovations in the structure of the contracts between the borrower and the lender;

It is necessary to reduce the risk of engaging in contracts in the financial markets.

The paper concludes by outlining a method to undertake research into market-based MFIs. It states that:

• The government has succeeded in regulating the banking sector, so as to minimize risks and prevent perverse hazards;
• Although MFIs differ in many ways from banks, they would benefit greatly from a study of the ways in which banks function, while also benefiting the customer.