Successful Microfinance in the Pacific: Achieving Financial Inclusion

This study was jointly commissioned by Pacific Islands Forum Secretariat and the UNDP Pacific Sub Regional Centre. It examines the status of microcredit across the Pacific region.

The paper explains that:

• There is a gap, a missing middle, between the traditional subsistence economy and the modern monetized economy;
• This gap is often filled by small and micro enterprise economic activities that are called the informal sector;
• Since the island peoples find it hard to cross the gap, some feel that policy should stimulate informal economic activity to fill in this missing middle.

The paper argues that:

• The reasons for the missing middle are complex;
• Microcredit is not a magic bullet capable of creating an informal sector where it is lacking in Forum Island economies;
• Microfinance, and not just microcredit, is necessary to achieve the financial inclusion of island peoples.

It recommends that:

• Both microfinance institutions, as well as formal financial institutions should provide a broad range of microfinance services;
• Governments must think systemically and consider how they can make their financial systems more inclusive;
• Information technology must be used to increase the feasibility of all modes of microfinance;
• Governments must remember that an enabling environment for financial inclusion is characterized by the absence of interest rate caps and subsidies, and of government grants that undercut sustainable microfinance.

The paper concludes that microfinance in the Pacific is growing and the possibilities for microfinance to play a significant role in the economic development of the region are increasing.