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p. 7 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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Challenges

The achievement in microfinance in the Region has been impressive relative to the status in the 1970s. However, a number of major problems remain.

Policy environment

Despite general improvement in the policy environment for financial sector programs, the policy environment for microfinance in many countries remains unfavorable for sustainable growth in microfinance operations. For example, in countries such as People’s Republic of China, Thailand, and Viet Nam, and the ceilings on interest rates limit the ability of MFIs to provide permanent access to an increasing segment of the excluded households.

Furthermore, DMC governments inappropriately and extensively intervene in microfinance to address the perceived market failure through channeling microcredit to target groups that are considered to have been underserved or not served by existing financial institutions. With subsidized interest rates and poor loan collection rates, these interventions undermine sustainable development of microfinance. As a result, most DMCs are crowded with poorly performing government microfinance programs that distort the market and discourage private sector institutions from entering the industry.

Inadequate financial infrastructure

Inadequate financial infrastructure is another major problem in the Region. Financial infrastructure includes legal, information, and regulatory and supervisory systems for financial institutions and markets. Most DMC governments have focused on creating institutions or special programs to disburse funds to the poor with little attention to building financial infrastructure that supports, strengthens, and ensures the sustainability of such institutions or programs and promotes participation of private sector institutions in microfinance.

The other major financial infrastructure-related problems include lack of (i) a legal framework conducive for emergence and sustainable growth of small-scale financial institutions, (ii) regulatory and supervisory systems for microfinance in countries where the microfinance subsector is approaching a level of maturity, and (iii) emphasis on development of accounting and auditing practices and professions. These are important for the development and expansion of market-based microfinance services because to serve clients who are outside the frontier of formal and semiformal finance, MFIs must have access to funding far beyond what external agencies and governments can provide. MFIs and microcredit portfolios cannot be safely funded with commercial sources in the long term, especially public deposits, unless appropriate performance standards and regulation and supervision regimes are developed and enforced and measures are introduced to protect public deposits.¹⁶ In most DMCs, formal and semiformal microfinance service providers are not supervised and regulated. While this may not be necessary for all types of MFIs, the lack of a system for supervision and regulation and the lack of adequate measures to protect public deposits impede development and integration of formal microfinance with the broader financial system.

Limited retail level institutional

Most retail level institutions do not have adequate capacity to expand the scope and outreach of services on a sustainable basis to most of the potential clients. Many institutions (i) lack capacity to leverage funds, including public deposits, in commercial markets; (ii) are unable to provide a range of products and services compatible with the potential clients’ characteristics; (iii) do not have an adequate network and delivery mechanisms to cost-effectively reach the poorest of the poor, particularly those concentrated in resource-poor areas and areas with low population densities; (iv) do not show a vision and a commitment to ensure their financial soundness and sustainability within a reasonable period, and become subsidy independent; and (v) do not have the capacity to manage growth prudently.

Most of the state-sector institutions or programs that provide microfinance services have been created within and nurtured by a distorted policy environment characterized by various degrees of financial repression. They do not have a business culture. Even new institutions created by the governments in most DMCs are unable to provide good quality services, let alone expand their services on a sustainable basis.

Most NGOs are also characterized by a high level of operational inefficiency, and have a very limited capacity to serve an increasing segment of the market on a continuing and sustainable basis. They suffer from governance problems mainly because they lack “owners” in the traditional sense of the term, and their management assumes a great deal of power. Heavy reliance on and relatively easy access to donor funds have aggravated the governance problems of some NGOs.

Inadequate emphasis on financial viability is the most serious problem of MFIs in the Region. This prevails among many NGOs, government-directed microcredit programs, state-owned banks, and cooperatives providing microfinance services. As a result, only a few MFIs are sustainable; most are not moving toward sustainability. In a context where resources are limited, “without self-sufficient financial institutions, there is little hope for reaching the numbers of poor firm-households that are potential borrowers and depositors.”¹⁷ Viability is also important from an equity perspective because only viable institutions can leverage funds in the market to serve a significant number of clients and contribute to broad-based development (Appendix 5). Viability is fundamental to reach a larger number of the poor which in turn is essential to have a significant impact on poverty reduction.

Inadequate investments in agriculture and rural

Agricultural growth, which underpins much of the growth in the rural nonfarm subsector, significantly influences rural financial market development. Thus, agricultural growth must be accelerated in much of Asia (footnote 1). However, many DMCs are not making adequate investments for agricultural growth and rural development. This is a major constraint on the development of sustainable microfinance services. The insufficient investments in physical infrastructure (especially irrigation; roads; electricity; and support services for marketing, business development, and extension) continue to increase the risk and cost of microfinance and particularly discourage private investments in the provision of microfinance services on a significant scale. Also, in the absence of economic opportunities created by growth-inducing processes, microfinance cannot be expected to play a significant role in poverty reduction.

Inadequate investments in social

The low level of social development, a distinctive characteristic of the poor in the Region, is a major constraint on the expansion of microfinance services on a sustainable basis. This is particularly true with respect to the poorest, women in poor households, poor in resource-poor and remote areas, and ethnic minorities. A vast amount of financial and human resources is required to address this issue. Private sector MFIs are not likely to invest in social intermediation¹⁸ given the externalities associated with such investments. The development of sustainable microfinance to reach a large segment of the potential market requires supporting social intermediation on a large scale.

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