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Home > Financing Best Practice > Rigidity in Microfinancing: Can One Size Fit All?

Financing Best Practice

Rigidity in Microfinancing: Can One Size Fit All?

by Dean Karlan and Sendhil Mullainathan

Executive Summary

  • Despite rapid growth in outreach, microfinance providers often have yet to reach a large proportion of the market of poor households.

  • One explanation may be that microfinance practitioners have been slow to implement innovations to the standard lending methodologies.

  • By tailoring products to clients’ needs and repayment capacity, flexible microfinance has the potential to reach many more clients at lower cost. This can be proven with randomized evaluations of flexible lending contracts.

  • Further work is needed to understand how this will impact on clients.

Introduction

In the span of a single decade microfinance has gone from being virtually unknown—to bankers, to development workers, and, most of all, to the poor—to being a household word. Ask anyone today to describe microfinance and most likely you will get a common answer: “That’s when banks lend to groups of poor women to start little businesses.” Much of this increase in awareness is thanks to the tireless work of industry advocates who have traveled the world convincing development organizations and funders that microfinance offers the best hope for large numbers of poor families to move out of poverty.

Practitioners, broadly speaking, have been offered three choices:

  1. Grameen Bank-style solidarity lending, with 12-month loans offered to groups of five poor women;

  2. FINCA-style village banking, with a four-month loan divided among a larger group of about 30 poor women; or

  3. ACCION-style individual lending to the moderately poor.

On most other features, these options are strikingly similar. All three target entrepreneurs with capital for sewing machines, chickens, tortilla presses, and the like. And all emphasize operational efficiency through product standardization, and good repayment through frequent regular payments that start shortly after the loans are disbursed. Here we discuss ideas that can be seen as “tweaks” to the above standard models. These tweaks increase the flexibility with an aim to improving the quality of the service received by the client.

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