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p. 5 of 24 BACK | NEXT Introduction Need for a Development Strategy for Microfinance Microfinance in the Asian and Pacific Region Demand for Microfinance Sservices Supply of Microfinance Sservices Major Achievements in Microfinance Challenges ADB’s Microfinance Experience Other Agencies’ Microfinance Experience ADB’s Microfinance Development Strategy Implementation of the Strategy

Microfinance Development Strategy : Microfinance in the Asian and Pacific Region

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Supply of microfinance services

The market structure in microfinance varies significantly across countries in the Region depending on their stage of financial development, level of economic development, policy environment, and other factors (Appendix 4). However, aspects of the supply, particularly about different types of suppliers, may be usefully discussed.

The microfinance services are supplied mainly by informal sources. Their collective outreach, both breadth and depth, is vast in most countries. They supply mainly short-term credit and charge higher interest rates than semiformal and formal sources. Because of the relatively greater bargaining power enjoyed by the informal suppliers in general, the terms and conditions under which services are provided do not enable the clients to fully harness economic opportunities. The informal sources operate in highly localized areas. Therefore, their contribution to financial intermediation and improvement of resource allocation is also limited. For example, informal sources do not allow savings to be collected from more than a small group of individuals well known to one another, and they do not move funds over large distances. Most informal insurance mechanisms are typically weak, particularly against repeated shocks, and often provide only inadequate protection to poor households.¹²

The involvement of formal sources in microfinance has increased during the last two decades. This greater involvement has stemmed from (i) the expansion of the scope of formal institutions into microfinance through downscaling and establishment of linkage programs with semiformal sources of different types; (ii) the emergence of new formal institutions focused on microfinance, such as the Grameen Bank of Bangladesh; (iii) reforms of state-owned financial institutions such as unit desas of BRI; and (iv) the introduction of new microfinance programs by the governments through nonfinancial institutions. However, the formal operations concentrate mostly on providing credit facilities, and savings mobilization has yet to receive adequate attention, with few exceptions.

Formal microfinance has changed to some extent with increasing involvement of private sector institutions. The Bank Dagang Bali in Indonesia has expanded its microfinance operations and increased its clientele. Badan kredit-desas, owned by Indonesian villagers, now reach 1.7 million clients, and the Grameen Bank in Bangladesh, owned largely by its borrower members, operates in over 38,000 villages with 1,140 branches and reaches about 2.4 million clients.

Cooperatives are also playing a significant role as financial intermediaries in the Region, particularly in India, Sri Lanka, Thailand, and Viet Nam. The thrift and credit cooperative societies in Sri Lanka reach about 800,000 households while primary agricultural cooperative societies in India have about 89 million members. These cooperatives, among other things, provide microfinance services.¹³ In many countries, the cooperatives have begun to explore possibilities for deeper penetration into the microfinance market and show a greater concern about their financial viability than they did in the 1980s.

A major feature of semiformal microfinance sources in the Region is the extensive involvement of NGOs. In virtually all DMCs (except for transitional economies such as the People's Republic of China and Viet Nam) NGOs have become important providers of microfinance services (Box 3). Their involvement is important because their clients in general are poorer than those reached by many formal institutions, their services are targeted in most countries to serve poor women, and their credit services are provided largely on the basis of social collateral. The small average loan sizes of NGOs, which usually range from about $30 to $150 per active loan account, suggest that their clients include the poorest.¹⁴ NGOs in some countries are trying to organize themselves into national coalitions to improve the industry standards and self-regulation. A few NGOs in the Region have plans to transform themselves into formal financial institutions.¹⁵

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