Outreach and Financing of Microfinance Institutions


CALL: 2008

DOMAIN: IS - Development and Performance of the Financial Systems





HOST INSTITUTION: University of Luxembourg

KEYWORDS: Microfinance institutions - outreach - financial sustainability - individual lending - Microfinance investments funds

START: 2009-03-01

END: 2011-02-28

WEBSITE: https://www.uni.lu

Submitted Abstract

Microfinance institutions (MFIs) provide very small loans and deposit services to clients that arepredominantly poor and excluded from the formal banking sector. The Microfinance sector has growndramatically over the last ten years, currently serving over 100 million households globally, compared to10 million households in 1997. This level of outreach has been possible thanks to a remarkablemobilization of funds – nearly $20 billion dollars- towards microfinance start-ups, by governments,development agencies, non governmental organizations (NGOs) and charitable foundations. In the longrun, however, donors and governments are likely to reduce funding, which raises the question of whetheror not subsidy-free programs and financial sustainability would be desirable. In fact, in recent years,microfinance institutions have experienced easier access to capital markets thanks to an increasinginstitutionalization of the sector, with a tendency towards more transparency, availability of quality data,public reporting, standardization of financial ratios, ratings and meeting of regulatory requirements. As aresult, a major development has been the rise of microfinance investment funds (MFIFs), which are poolsof suppliers of funds who collectively invest in a diversified range of MFIs. These new financialintermediaries have been instrumental in attracting a wider scope of providers of financial resources forMFIs, including private and institutional investors. However, the requirements of these new providers offunds are likely to encourage MFIs to evolve into true commercial entities. Therefore, a main concern iswhether or not financial sustainability and the recent changes in the financing structure of microfinanceinstitutions come at the expense of undermining their social objectives. The present research projectspeaks to this question. We propose an empirical investigation of the causal impact that a broader accessof microfinance institutions to different sources of capital has on the lending properties of theseinstitutions.

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