Author : Thapa, Ganesh

Summary : Microfinance has become an important tool for poverty reduction in many parts of the world, including Asia and the Pacific region. Microfinance institutions (MFIs) target the poor through innovative approaches which include group lending, progressive lending, regular repayment schedules, and collateral substitutes. This paper reviews the experiences of microfinance institutions in different parts of the world in the areas of sustainability and governance, and draws lessons for Southeast Asian countries.

In microfinance, sustainability can relate to organisational, managerial and financial aspects but the issue of financial sustainability of MFIs has attracted more attention in mainstream analysis. In the region, the South East Asian MFIs fare well in terms of financial sustainability as they earn positive returns on assets and equity, covering much higher cost levels by earning more from their loan portfolios. In contrast, South Asian MFIs have negative returns on assets and equity, despite having one of the lowest expense structures in the world.

MFIs face an apparent tension between achieving financial sustainability and contributing to poverty reduction. Exclusion of the poorest from microfinance schemes is a well-known challenge. While some of the poorest fail to participate in such schemes either because of their lack of awareness or inability to overcome their social exclusion, many more are excluded because of arbitrariness in the selection of beneficiaries and inadequate flexibility in the design of the scheme.

If MFIs have to serve the poor in remote rural areas, it may be difficult for them to achieve financial self-sufficiency. In such a case, some level of subsidy may be justified if they can be shown to be more effective than alternative strategies to reduce poverty. Nonetheless, these MFIs should strive to achieve financial sustainability by reducing operational costs and charging market rates of interest. The higher the degree of self-sufficiency, the greater the extent to which an MFI can leverage donor and government funds to expand outreach.