Conclusions

Despite the current enthusiasm among the donor community for microfinance programs, rigorous research on the outreach, impact and cost-effectiveness of such programs is rare. Design of aid programs would ideally incorporate evidence on all three points, but the research that does exist generally focuses on only one of these criteria: either outreach, impact or cost-effectiveness. In part this reflects the difficulty of establishing an appropriate statistical methodology and implementing those standards in practice, and in part no doubt reflects the variation found in practice in the way in which microfinance operates. The evidence surveyed here suggests that the conclusion from the early literature, that whilst microfinance clearly may have had positive impacts on poverty it is unlikely to be a simple panacea for reaching the core poor, remains broadly valid. Reaching the core poor is difficult and some of the reasons that made them difficult to reach with conventional financial instruments mean that they may also be high risk and therefore unattractive microfinance clients.

Asia has much to learn from Latin America in terms of developing a vibrant commercially oriented MFI sector. However MFIs in Latin America have often been seen as a vehicle for the development of the micro-enterprise sector rather than as a tool for the removal of core poverty, which was its initial focus in much of Asia. Work on Bolivia has demonstrated this at least for that country. There has been an extensive debate that we do not touch on here, on the financial sustainability of MFIs. We would simply make the point that just because an institution needs a subsidy to cover its costs in itself is not a reason for not supporting the institution. The issue would be what benefits, in terms of income gains for the poor, can be achieved with the subsidy and how the ratio of subsidy to benefits compares with that for other interventions. Detailed cost effectiveness studies are rare and those that are available show both high and low scores for MFIs in the same country. Hence there is a need to continually improve design and outreach and to see MFIs as part of the package for targeting the poor, rather than the whole solution.

Our view is that despite the difficulties, there is a need for more careful research on the outreach, impact and cost-effectiveness of microfinance programs - studies that rigorously address the critical issues of selection and placement bias. Such studies can inform the debate on the way forward for microfinance by sharpening the donor community's understanding of the role of microfinance in reaching the poor, its impact in different environments, and its cost-effectiveness as a poverty intervention.

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