Enabling Environments for Microfinance: A Concept Note

This paper examines key elements that constitute an enabling environment for microfinance. The objective of the study is to determine environmental factors critical to the success of the microfinance innovation grant provided by The Bill and Melinda Gates Foundation.

The paper describes the macro level factors comprising institutions and regulations, and meso level factors pertaining to infrastructure that together constitute the enabling environment. It highlights features of microfinance that need to be accommodated in the enabling environment for finance. These include:

• Objective of deepening financial markets and extending financial services to clients with few other options;
• High unit costs of lending;
• Undiversified and often volatile nature of MFI credit portfolios;
• Lack of collateral;
• Focus on social goals rather than sustainability and financial accountability;
• Risk in microfinance market when MFIs are not properly monitored and managed.

The paper analyzes the relationship between factors in the enabling environment and financial access. It states that enabling environments analysis combined with other research such as empirical impact assessment and qualitative studies can help gain a clearer understanding of the impact of grant-funded innovations.