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12.01.2010

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Marika Mathieu

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What is a Microfinance Institution?

Microfinance institutions, or MFIs, come in all shapes and sizes. They can differ in scale, experience, legal statute, strategy and budget. What lies at the heart of the microfinance system is the issue of reliability. Reliability determines how smoothly an MFI operates.

First of all, microcredit cannot exist without microfinance institutions. These organizations provide hard-to-find financial services to local individuals and groups. MFIs aim to promote economic activity among low-income earners, for whom access to official banking services is impossible or nearly so.

An MFI's reach can vary tremendously. One institution could serve a hundred clients while another MFI, such as Grameen Bank or BRAC, could serve six million. (See About Microcredit.)

MFIs are organized in such a way that they provide quality viable long-term services. Generally speaking, an MFI is made up of a head office and a number of credit agencies. The agencies are located in different parts of the region in question. Their credit agents carefully select each and every client and take charge of loan approvals, loan reimbursements, savings management, and other services. As they understand how to create economic activity, they act as business advisors and provide precious counsel to borrowers.

An MFI can fall into different legal categories depending on the country in which the institution is based. An MFI could be an NGO, a credit cooperative or a non-bank financial institution; its particular statute would dictate what kind of funding it receives. An NGO is not allowed to accept borrowers' savings and must be financially supported by various subsidies and bank loans. Meanwhile, a credit cooperative relies heavily on client savings. As for the non-bank financial institution, this organization may take some savings deposits but it is mostly financed by shareholders.

An MFI is characterized as having dual objectives—they are both social and financial. The former aim means that the MFI contributes to development and fights against poverty. The latter objective stresses that the MFI must remain profitable enough to continue operating1. This balance is not always easy to achieve. Each MFI's strategy, whether it is more community-centered or more economic, will determine operating decisions.

The viability of a microfinance institution is based on several factors: compatibility with the environment, strong on-field knowledge, clear governance, and financial health. In terms of financial stability, an MFI must be in no hurry. A promising MFI needs to make it through an average of five years before finding a steady working rhythm. This could take even longer in a rural environment with a low-density population. To be sustainable, an MFI must keep a balanced budget, all while growing to meet the needs of an expanding clientele.

Which MFIs can be counted on? Anne-Sophie Perrachon, Operations Director at Microworld, says, "We use clear and objective criteria: solid financial history, good performance in terms of social benefits, and transparency."

Although these demands seem simple, few MFIs actually meet these expectations2. As microfinance continues its rigorous development, the number of trustworthy microfinance institutions will, and must, go on the rise.

1 Le guide de la microfinance. Microcrédit et épargne pour le développement. Sébastien Boyé, Jérémy Hajdenberg and Christine Poursat. Ed. d'Organisation, 2008, 304 pages, 29 euros.

2 A growing number of MFIs around the world are sharing their financial information and other performance-related data to international organizations. The largest databank can be found at MIX at www.mixmarket.org.

Article traduit par Catherine Jan.

This article is part of the special report: