Donors' Support for Microcredit as Social Enterprise

Donors' role in advancing microfinance programs
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This paper examines the nature of donor support to microfinance programs and the effectiveness of such aid on microenterprise development and poverty alleviation.

The paper studies:

  • Economics of microfinance as an instrument of microenterprise development and poverty reduction;
  • Microfinance delivery mechanisms;
  • Empirical evidence of the performance of microfinance institutions (MFIs);
  • The negative effects that arise from emphasis by donors on the twin targets of financial sustainability and outreach of the poor.

The paper suggests:

  • Design of microfinance programs be improved;
  • Financial products and loan portfolio be diversified to meet the various needs of microenterprises;
  • Donors formulate their policies on a better understanding of the symbiotic links between financial and real sector development;
  • The conflict between attaining financial sustainability and poverty reduction be re-examined.

Recognizing the trade-off between the twin objectives of financial sustainability of MFIs and their social impact on the poorest, the paper finally discusses the implications for donor policy:

  • Helping MFIs to strategically plan incremental targets in sequence to achieve sustainability;
  • Adopting a system-wide approach (without excessive focus on credit) to help develop financial services market in transition economies;
  • Complementing micro credit programs with equity grants for small businesses;
  • Discouraging aid dependency culture among MFIs.

About this Publication

By Nissanke, M.