Donors' Support for Microcredit as Social Enterprise

This paper examines the nature of donor support to microfinance programs and the effectiveness of such aid on microenterprise development and poverty alleviation.

The paper studies:

• Economics of microfinance as an instrument of microenterprise development and poverty reduction;
• Microfinance delivery mechanisms;
• Empirical evidence of the performance of microfinance institutions (MFIs);
• The negative effects that arise from emphasis by donors on the twin targets of financial sustainability and outreach of the poor.

The paper suggests:

• Design of microfinance programs be improved;
• Financial products and loan portfolio be diversified to meet the various needs of microenterprises;
• Donors formulate their policies on a better understanding of the symbiotic links between financial and real sector development;
• The conflict between attaining financial sustainability and poverty reduction be re-examined.

Recognizing the trade-off between the twin objectives of financial sustainability of MFIs and their social impact on the poorest, the paper finally discusses the implications for donor policy:

• Helping MFIs to strategically plan incremental targets in sequence to achieve sustainability;
• Adopting a system-wide approach (without excessive focus on credit) to help develop financial services market in transition economies;
• Complementing micro credit programs with equity grants for small businesses;
• Discouraging aid dependency culture among MFIs.