Learning Curves: Microfinance Development Strategy: Sector Performance and Client Welfare

Date: December 2012
Type: Papers and Briefs
Country:
Subject:
Evaluation; Finance
Series: Learning Curves

Description

The microfinance industry is rapidly evolving, becoming more commercialized at a time when financial inclusion is a crucial goal of development. Against this backdrop are two ongoing debates on the role of microfinance in economic development and poverty reduction. The first is whether integrating microfinance into the formal financial system by transforming nongovernment organizations into regulated, commercial microfinance institutions has improved access to finance for the poor or, on the contrary, caused microfinance institutions to deviate from serving the poor. The second debate is whether microfinance really improves the welfare of clients. Findings on this had been generally positive, but more skeptical views are emerging based on improved impact evaluation methods and data quality.

This Learning Curve provides an overview of the evaluation on ADB’s microfinance development strategy. The study had two objectives: assess the performance of the ADB’s microfinance assistance, and build knowledge on the effectiveness of microfinance in reducing poverty based on ADB’s experiences. The study was based on ADB’s microfinance portfolio of 78 loans, grants, technical assistance operations, and private sector investments totaling $2.5 billion provided to 21 developing countries during 2000–2010. The study assessed the portfolio’s relevance, responsiveness, and results. In addition to country studies for Cambodia, Pakistan, Papua New Guinea, the Philippines, Uzbekistan, and Viet Nam, the study conducted impact evaluations on the Microfinance Sector Development Program in Pakistan and the Rural Enterprise Finance Project in Viet Nam. The impact evaluations assessed the degree to which these programs improved the welfare of clients.

The study emphasizes the twin goals of microfinance—reaching the poor and being financially sustainable. With microfinance becoming increasingly commercialized in the region, the study stresses the role of government and agencies such as ADB in addressing the financial needs of the poor, while ensuring the institutional sustainability of microfinance providers.

The study recommends that future ADB microfinance interventions target poor and low-income households using “deliberate and innovative approaches,” the close monitoring of beneficiaries’ poverty levels, and the empowerment of women. It also recommends a more demand-side orientation in microfinance interventions that focuses on client needs to make microfinance more beneficial for borrowers.