Public policy in microfinance



Microfinance for many years has proved to be one of the tools to alleviate poverty. Microfinance institutions (MFIs) are in the forefront in providing loans for water and sanitation, biogas and solar energy. However, the industry is in the cross roads with the issue of where to draw the line between serving the social cause of poverty alleviation and its business interests of profit maximization. The excitement of microfinance as a tool to fight poverty is being given attention to undo some of the problems and developmental lacks faced by societies at large. Some of the common problems of developing countries are high population growth, poverty, pollution and scarce water, lack of political will, bad development practices, inadequate human resources and skills.

But who should unlock these problems? Should the government take the lead? Or should it be NGOs, banks or is it the responsibility of the MFIs? With the distribution networks and outreach ability, MFIs are the best tools to deliver these products to the poor. Partnerships between MFIs and Multi-National Corporations are effective as they foster growth and create synergies.

Why MFIs should provide these services?

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Microfinance is an enabling and empowering tool to poverty alleviation that has provided low-income households in developing countries both economic and non-economic empowerment. Microfinance can be a tool used to reduce poverty, with a for-profit enterprise that is self-sustaining and poverty alleviation driven motives. Microfinance is progressively becoming a tool to development priorities for developing countries governments. Moreover, these services can be provided with other financial services and still be profitable. Therefore, MFIs are finding ways to improve their portfolio quality by assisting their customers. Partnership can provide sustainable, competitive advantage to MFIs while helping them achieve their mission of improving the lives of those they serve.

Blindly following this responsibility, MFIs can run the risk of harming themselves financially unless supported by partners. Introducing new products and services can quickly overshoot the operational costs of the MFI beyond control. Remember! MFIs are business units for profit in order to be sustainable. In a nutshell, many MFIs have recognised the need of these services and they have formed strategic alliances and partnerships among other NGOs, Government Departments and International donors.

How do MFIs deliver these social and sanitary services?

The poor are vulnerable to poor health conditions, economic instabilities and dynamics in business environments which can strain loan repayments. However, by providing services that improve the poor household, their financial management and businesses, MFIs can strengthen their social performance by effectively translating their mission into practice; reaching the clients, meeting the needs of the clients; and impacting positively to the lives. The following are the delivery channels:

  • Credit with Education: The groups, mostly poor women come together and are trained to manage the affairs of their group and families. The officers of the MFI provides training and support on how to make loan repayments, savings deposits and other issues on health, self-esteem and business management.
  • Community-based Organisations: Improves access to health facilities in remote areas where no health services exist. Few community members are selected and trained to deliver information and products directly to their other members who meet regularly.
  • Linkages with health: Linkages between microfinance and health provide the poor with access to health services as well as financing. MFIs mediate access to or directly offer health related services to their clients combined with financial services. Linking these services will leverage microfinance outreach and establish good rapport with its clients and also reach more poor people.
  • Water and sanitation linkages: Microfinance is playing a more important role in water provision and sanitation or sanitation-related services. MFIs and development of projects can be linked to subsidised activities such as sanitation and technical support for effectiveness. MFIs has been instrumental in the construction of household latrines and other sanitary activities and hygiene.

Who benefits from these non-financial services?

  • Personal/Household level:- Empowerment of women, better education and further development of MFI clients, ability to cope with economic shocks and higher income. This leads to increased access to education, sanitary infrastructure and food supply.
  • Local community Level: - Creation of jobs, higher quality of jobs, stable income hence resilient to external shocks, cohesiveness of the community, healthy competition, entrepreneurship. All these will lead to increased trade with neighboring communities and regions, improved economic base and resilience of the community.
  • Regional Level: - In Most developing countries, microfinance is the backbone of the economy, providing up to 80% of the country's jobs especially in rural areas. This will reduce the pressure on environment and natural resources and finally reduce migration flows to urban areas.

Where MFIs have succeeded in social and sanitary provision

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In Burkina Faso for example, LAGEMYAM, a women's association, set up household management of domestic waste. The loans for improved sanitation was provided as start up capital without security but based on moral values. However, MFIs like ASCI in Ethiopia and K-Rep in Kenya provide services to Community Based Organisations for water in rural areas.

BRAC in Bangladesh, partners with health providers to increase their clients' access to health facilities. It integrates agricultural and financial services hence a reduction in poor women in prostitution activities as a means of obtaining money. Also, BRAC teach their clients on their rights and offer legal services were necessary.


Microfinance services especially non financial are needed everywhere, including the developed world, though need more in developing and emerging countries. Combining financial and non-financial services is essential for addressing the aspects of development. For MFIs to provide the non-financial services efficiently, it is vital to have other organizations as partners. Microfinance can be a powerful tool for giving the poor varied economic options. However, the very poor need more than just microfinance to address their poverty. The ultimate way is to have synchronized mixture of microfinance services and other development services. This will improve income and assets, education, family planning, nutrition, health and social support networks of the poor.

The question is how to ensure a combination of appropriate services in rural communities and other communities where these services are unavailable? The concern for sustainability has made practitioners very cautious about non-financial services. They believe that these services will not make MFIs sustainable. However, some MFIs have fostered partnerships with their non-financial service providers' counterparts and they are sustainable.