Can We Improve the Impact of Microfinance? A Survey of the Recent Literature and Potential Avenues for Success

Robert Lensink, Erwin Bulte

Research output: Chapter in Book/Report/Conference proceedingChapterAcademicpeer-review

Abstract

By surveying the latest literature, this chapter aims to contribute to the recent discussion on the successes and failures of microfinance. We argue that the question “does microfinance work?” is neither important nor informative. What matters is knowing when, and in which conditions, microfinance works—and for whom. We claim that the answers to these questions depend on the details of the microcredit contract as well as on the range of services that microfinance institutions provide (including non-financial ones). We point at two important reasons why the impact of several microcredit programs is lower than expected: (1) the rigidness of credit contracts, and (2) the human capital of end-users. As reforming contract terms and building human capital via business training and technical assistance are costly, we argue that perhaps subsidies are needed. We focus on studies dealing with end-users, and pay specific attention to the evolving discussion on group lending and the role of joint liability to reduce asymmetric information problems and improve repayment rates. We also discuss the literature focusing on the recent shift of several microfinance institutions to individual lending, and the related trend toward commercialization of microfinance.
Original languageEnglish
Title of host publicationThe Oxford Handbook of Banking
EditorsAllen N. Berger, Philip Molyneux, John O. S. Wilson
PublisherOxford University Press
Chapter13
Pages404-430
ISBN (Electronic)9780191863394
ISBN (Print)9780198824633
DOIs
Publication statusPublished - 6 Nov 2019

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