Public-Private Partnerships in Microfinance: Should NGO Involvement be Restricted?

This paper examines public-private partnerships in microfinance, whereby non-government-organizations (NGOs) can help in channelizing credit to the poor - both in borrower selection as well as in project implementation. The paper argues that a distortion may arise out of the fact that the private partner, i.e. the NGO, is a motivated agent. The authors state that:

• An NGO can potentially provide two services:
• Identifying good borrowers;
• Helping borrowers implement their projects more efficiently;

• There is a high correlation between NGO involvement and the success of bank-financed projects;
• However, for NGOs, the more efficient borrowers are ‘less needy, so that maximizing aggregate borrower utility may involve channelizing the loan to less efficient borrowers.The authors find that whenever the project is neither too productive nor too unproductive, reducing such distortion requires ‘unbundling borrower selection and project implementation, with the NGO being involved in borrower selection only. The authors conclude that their findings have the following implications:
  • An agent, who is efficient in one of the stages of the program, need not be efficient in another;
  • Since private agents are profit-maximizers, their choice may involve selection of poor quality;
  • The self-serving behaviour of NGOs is the only possible source of distortion;
  • NGOs should therefore be kept out of project implementation activities in villages that are either too poor or too rich.