Microfinance: Its impact, outreach and sustainability Niels Hermes # * and Robert Lensink # ¶ # Centre for International Banking, Insurance and Finance (CIBIF), Department of Economics and Business, University of Groningen, the Netherlands ¶ Development Economics Group, Wageningen University and CREDIT, University of Nottingham, UK Keywords: microfinance, impact, outreach, sustainability JEL Codes: G21, I32, O12, O16 * Corresponding author : Faculty of Economics and Business, University of Groningen, PO BOX 800, 9700 AV Groningen, the Netherlands; telephone: +31-50-363-4863; fax: +31-50-363-8252; email: [email protected] 1
ABSTRACT This symposium brings together recent empirical contributions with respect to a number of related and highly relevant issues on the economics of microfinance. In particular, the contributions provide answers to the following two main questions: (1) Does microfinance have an impact on the social and economic situation of the poor in developing nations; and (2) Are microfinance institutions sustainable in the long term and is there a trade-off betweensustainability and outreach?
1. INTRODUCTION The role of microfinance has attracted significant interest in recent years, both from policy makers as well as in academic circles. However, as has been pointed out in a recent special issue on microfinance in The Economic Journal (Hermes and Lensink, 2007), many questions regarding microfinance remain unanswered. In particular, the following two pressing issues should receive more attention: (1) Does microfinance have an impact on the social and economic situation of the poor in developing nations? This question is very relevant since a lot of effort and resources have been put into developing microfinance, especially since the beginning of the new millennium, as an instrument to combat poverty. (2) Are microfinance institutions sustainable in the long term; is there a trade-off between sustainability and outreach? Again, this is a very relevant question, since putting emphasis on poverty reduction comes at a price, which may reduce the scope for financial sustainability and vice versa. This symposium contains eight original contributions that provide new empirical evidence on these two issues. First of all, four of the eight contributions address the question of the impact of microfinance on the well-being of the poor in developing nations. Does microfinance have a measurable impact on the social and economic situation of the poor in developing nations? The other four contributions focus on the trade-off between reducing poverty and being financially sustainable at the same time, i.e. can MFIs finance their own operations without compromising their mission to reach out to the poor? The current symposium for World Development elaborates on the special issue in The Economic Journal (Hermes and Lensink, 2007) in a number of ways. In the 2007 special issue we primarily dealt with joint liability group lending, providing new insights with respect to why and how this type of lending works in enhancing repayment rates. We also touched upon the issue of the trade-off between the financial sustainability and outreach of 3
microfinance programs. In this symposium, we provide much more evidence on the trade-off
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