Armendariz_Morduch[1] - Goodhart_05.qxd 3:42 PM Page 135 5...

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135 5 Microfinance: Where do we Stand? Beatriz Armendáriz de Aghion and Jonathan Morduch 1 Introduction Economies are built upon people buying and selling, lending and borrowing. The beauty of the market is that, when it works well, sellers are matched to buyers and lenders are matched to worthy borrowers. But when the market does not work well, goods go unsold and promis- ing investment projects go unfunded. We understand why markets fail – the economics of information provides rigorous underpinnings for why credit markets, in particular, are so problematic. 1 The challenge has been to move from diagnosis to prescription. The challenge is particularly great in poorer regions, where individuals may have workable ideas and relevant experience but lack collateral. Even a £100 loan can make a dif- ference to a small-scale shopkeeper or craftsperson in countries like Nepal or Uganda, but formal sector banks have steered clear, focusing instead on larger loans to better-established, wealthier clients. The microfinance movement has aimed to change all that. The hope is that by using innovative new contracts, microlenders can both make profits and serve the under-served. While the full promise is as yet unmet (profits remain hard to squeeze out and the very poor are tough to reach), there are a growing number of success stories and, world wide, nearly 70 million low-income individuals are served by microfinance institutions (Daley-Harris 2003). In this chapter we first focus on the innovations that have made micro- finance possible. We then deliver an overview of recent trends. We argue that the future of microfinance institutions is ultimately in the hands of international donor agencies and local governments, which have been recently promoting competition and stressing financial self-sustainability as a way to maximize the breadth of outreach. The strategy is a major Goodhart_05.qxd 23/4/04 3:42 PM Page 135
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136 Beatriz Armendáriz de Aghion and Jonathan Morduch departure from traditional approaches to foreign aid, and it challenges the role of applied welfare economics as the leading framework for pol- icy analysis. In the traditional framework, cost–benefit analyses are used to determine the allocations of subsidies that can do the greatest good for the greatest number. In the new world of microfinance, many eschew subsidies for all but start-up expenses, and the aim is to become fully profitable, independent institutions. In Section 1 we provide background to the current debate on the role and scope of microfinance institutions. In particular, we deliver a brief explanation of how the innovative “group lending” technique gained donors’ attention, and how it captured the imagination of academic economists. In Section 3 we argue that the dissemination of microfi- nance institutions was facilitated by additional innovations, and we focus on four: the use of “progressive lending”, the flexible treatment of collateral, the focus on women as customers, and the promotion of
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Armendariz_Morduch[1] - Goodhart_05.qxd 3:42 PM Page 135 5...

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