New Evaluation Finds Microfinance Operations Have Had Difficulty in Reaching the Very Poor

LONDON, November 29, 2010 - A meta-evaluation on microfinance released by the Evaluation Cooperation
Group of international financial institutions reports that microfinance
operations have had difficulty in reaching the very poor.

Microfinance, specifically micro-lending - defined broadly to cover both
small loans to the poor, often but not exclusively based on group liability,
as well as small loans to microenterprises, based on character or projected
cash flow - has emerged as an important innovative form of financial
intermediation over the last 30 years. The multilateral development banks
(MDBs) have played an important role in the evolution of the industry,
initially seeing it as an important instrument for targeting poverty and,
more specifically, for targeting poor female borrowers, and more recently as
a means of expanding the access of poor households and microenterprises to a
range of financial services.

The institutional modalities of microfinance have changed markedly.
Grameen banking innovated group liability for dealing with asymmetric
information, enforcing repayment and helping the poor. But Grameen banking
itself has moved to individual lending in its subsequent lending methodology
- with a special window for the very poor. This shift is based on the
observation that above a certain value of loan, both lenders and borrowers
have a preference for individual lending.

The donor community has strongly encouraged the shift towards greater
commercialization of microfinance institutions (MFIs) on the grounds that
this would reach more poor borrowers in a sustainable manner. However, a move
in this direction runs the risk of an increased concentration on the less
poor, as these are more likely to take out larger and, hence, lower cost
loans. There is also a concern that aggressive marketing of microfinance may
push poor borrowers into taking high-cost loans. Also, one recent analysis
found that, as group-lending MFIs get bigger, they lend less to the poor and
to women.

Microfinance operations require the following for their success: (i)
financial sustainability on the part of the participating MFIs; (ii)
high-standard consultancy and technical assistance to them as well as to
their regulators; (iii) sound regulation and monitoring; and (iv) flexibility
in product design, including new products. However, to reach the very poor,
microfinance intervention requires careful design and a means of preparing
the borrowers for full participation.

To download the report, visit:
www.ecgnet.org/documents/microfinance.

For more information about the ECG, visit: www.ecgnet.org.

ABOUT ECG: The Evaluation Cooperation Group (ECG) is a network of
evaluators of multilateral development banks (MDBs) established in 1996 to:
strengthen the use of evaluation for greater MDB effectiveness and
accountability; share lessons; harmonize performance indicators and
evaluation methodologies and approaches; enhance evaluation professionalism
within the MDBs and collaboration with the heads of evaluation units of
bilateral and multilateral development organizations; and facilitate the
involvement of borrowing member countries in evaluation and build their
evaluation capacity

The ECG is composed of the African Development Bank, Asian Development
Bank, European Bank for Reconstruction and Development, European Investment
Bank, Inter-American Development Bank, International Monetary Fund, and the
World Bank Group.

The CEB Council of Europe Development Bank, the International Fund for
Agricultural Development, Islamic Development Bank, United Nations
Development Programme Evaluation Group, and the Evaluation Network of the
Development Assistance Committee of the Organisation for Economic
Co-operation and Development are observers.

USA, Sona Panajyan, Washington, D.C., +1-202-473-9751, spanajyan at ifc.org, or Ramesh Adhikari, Manila, The Philippines, +1-632-632-6312, radhikari at adb.org