Building Viable Microfinance Institutions: Lessons From Other Developing Countries

This paper identifies factors that contribute to viability of MFIs. It draws on experiences and success stories of different regions and MFIs. The paper reviews literature on various microfinance models and identifies factors critical to success of MFIs. It presents case studies of microfinance sectors in Bolivia, the Caribbean and Nigeria and profiles six MFIs from around the world. Findings include:

• Entry of commercial banks into microfinance is constrained by risk of lending and cost of deposit-taking;
• Government-promoted programs fail due to limited range and focus of microfinance services, interest rate capping, exemption from regulations and managerial deficiencies;
• Group loans can reduce risk especially in rural areas;
• Government can partner with private investors and use fiscal incentives to promote MFI viability;
• MFI sustainability requires commercial operations and change in organizational culture;
• Access to credit is more important to the poor than its cost;
• Greater outreach requires expansion of MFIs product range;
• Information and communication technology reduces cost and increases access of microfinance;
• Microfinance benefits from transformation of existing institutions and assistance from international agencies.

The paper concludes with recommendations for governments, donors and other stakeholders.