The Role of the State in Promoting Microfinance Institutions

This paper presents the evolution of views on the role of the state in the financial System. It investigates theoretical and empirical points of view from the interventionist period of the 1960s and 1970s to the current period of liberalization. It looks at of the success of numerous microfinance institutions (MFIs) and the many difficulties, which must be urgently resolved. These difficulties raise specific questions on the role of the state in promoting MFIs:

• Which state-owned institutions may be necessary?
• What level and type of subsidisation of the financial institutions can be accepted?
• What can be the choice for the state between alternative investments in financial institutions or complementary services?
• What are the necessary conditions for creating a favorable environment?

Drawing from country case studies it:

• Illustrates the divergent role of the state in the development of the rural financial system;
• Reviews the respective role of the state, the NGO and the private commercial banks in increasing their outreach and in adopting microfinance innovations.

It also analyzes different issues regarding regulation of MFIs and concludes with a discussion of the necessary roles of the state in promoting MFI.