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Global Solidarity: Towards a More Rational and Transparent Promotion of Micro-Finance Institutions

Annual Call for Projects 2002

Summary

Micro-finance is an anti-poverty strategy that can make a tangible contribution to the attainment of the Millennium Development Goal to halve poverty by 2015. There are close to 10,000 micro-finance institutions that effectively work with and serve the poor, yet with few exceptions, most have not yet reached the scale and outreach necessary for full cost-recovery and remain dependant on contributions from donors. This continued subsidy dependence should be reason to revisit one of the basic tenets of the micro-finance industry, namely the financial sustainability of the intermediary serving the poor. Either a micro-finance institution goes "up-market" to relatively larger loan amounts, or it remains partly financially unsustainable and subsidy-dependent: serving the poor may remain a loss-making proposition.

Micro-finance institutions nevertheless help the poor to cope better with risk, to take advantage of small investment opportunities and reduce their vulnerability. In the absence of micro-finance institutions, there is no alternative: neither banks nor the State would want to take their place. Continued subsidy requirements in micro-finance may not be a pleasant prospect for aid agencies, as subsidies are difficult to target and often give negative incentives. Still, there is a "public good" case for subsidies, if the net social benefits exceed those of not doing anything and those generated by alternative government funded anti-poverty programs, like food for work, grants or other welfare programs. While the evidence points in the direction of a general superiority of micro-finance as an anti-poverty strategy, a conceptual framework is still lacking to structure such subsidy measures internationally.

This research project will lay the conceptual groundwork for a more rational, transparent and efficient support strategy for micro-finance institutions globally and possibly serve as the basis for a global solidarity fund. It aims, firstly, to analyse the characteristics of an efficient, poverty-oriented micro-finance institution and determine whether all existing institutions are indeed subsidy-dependent; secondly, to determine the subsidy form that is most effective for these micro-finance institutions and to spell out over what time frame and under what conditions long-term support would be required; thirdly, to design transparent and verifiable norms and rules for donor support to micro-finance institutions so to avoid negative externalities of competition amongst donors and; lastly, to define the purpose, operating modalities, funding requirements and governance of possible funding mechanisms.

The outcome of this work will feed into capacity building of micro-finance institution managers, advisory services to governments in developing countries, for staff seminars at donor offices, most effectively to be held in conjunction with decisions on budget choices in anti-poverty programmes, poverty reduction strategy papers and other debt rescheduling initiatives.

The grant provided by the GIAN for this project totals SFr 300,000

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Project Team

Dr. Bernd Balkenhol , Coordinator, Social Finance Programme , Employment Policy Department (EMP/POLICY), Employment Sector (EMPLOYMENT) , International Labour Organisation (ILO) .

Mr Flavio Comim , Principal Member, University of Cambridge .

Prof. Daniel Fino , Principal Member, Graduate Institute of Development Studies (GIDS) .

Ms Yousra Hamed , Principal Member, International Labour Organisation (ILO) .

Prof. Jean-Michel Servet , Principal Member, Graduate Institute of Development Studies (GIDS) .

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Related Conferences

Microfinance: A Solution to Reduce Poverty? Debate at the FIFDH – 15 March 2007, 8:00 pm, Maison du Grütli
The GIAN co-presents a debate on microfinance in the framework of the International Film Festival on Human Rights...
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Research Output

Microfinance and Public Policy: Results of Survey Questionnaires: Synthesis Report
(available in English only)
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Microfinance and Public Policy: Outreach, Performance and Efficiency
(available in English only)
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