Case Study

Using Microfinance Institutions in Poverty Alleviation: A Case of the Blind Leading the Blind?

How are microfinance institutions to be made sustainable and viable?

The paper outlines the perceived role of microfinance institutions (MFIs) in alleviation of poverty. It brings to fore key areas with respect to MFIs that need immediate attention:

  • Increasing outreach: MFIs are unable to act as financial intermediaries thereby limiting their reach and capacity to develop and offer varied financial products and services. They also lack trained staff and an effective delivery mechanism;
  • Viability and sustainability: A large number of MFIs depend on grant subsidies. They also lack appropriate legal framework, which hinders their expansion of equity, mobilization of deposits and tapping of financial markets. They need to develop sound internal policies, systems and procedures, as well;
  • Need for policy and regulatory framework: The near absence of a formal regulatory framework leads to problems such as lack of credit evaluation, performance standards and portfolio supervision, leading to poor loan recovery and deterioration of its quality.

The author concludes by recommending:

  • Converting MFIs into full-fledged financial institutions or investing in other formal finance institutions;
  • Building up of equity base and diversification of portfolio;
  • Providing appropriate supervisory and regulatory framework;
  • Training of MFI, rural banks' and cooperatives' staff in microfinance technologies;
  • Upgrading of operation, audit and performance standards;
  • Professionalizing management and staff of MFIs.

About this Publication

By Llanto, G.
Published