Microfinance: Sustainable Tool for Urban Poverty Alleviation

This policy working paper examines microfinance as a sustainable tool for urban poverty alleviation in Latin America and the impact government actors have on the sector. The paper defines the value of microfinance and its role in development within the urban Latin American context, stating that:

• Government actors can make important contributions to the microfinance industry;
• Developed countries often channel government activity through bi- and multi-lateral aid agencies;
• Government actors in developing nations impact the sector through economic policy, financial institution regulation and supervision;
• They can link microfinance to other productive financial flows, particularly remittances;
• Stakeholders leading oversight of the sector should legislate prudently in consultation with microfinance industry and civil society actors to end with functional and meaningful oversight.

The paper defines 'sustainable microfinance' and considers it in the light of two goals:

• On a micro level - financially self-sufficient institutions able to provide services without external funding;
• On a macro level - industry 'massification' to rapidly extend outreach and make microfinance a meaningful vehicle for poverty alleviation.

Test factors of sustainability, according to the paper, include:

• Market-driven cost of services to clients;
• Institutional financial soundness;
• Repeat clients;
• An ongoing industry.

The paper concludes by proposing:

• A research agenda to develop deeper support for policy recommendations;
• Key themes and specific research projects along with tools to carry them out.