Authors: Jay Rosengard
October 1, 2000
Center for Business and Government, John F. Kennedy School of Government
There are some obvious characteristics of developing countries that we often forget or choose to ignore. Most people are poor. Working poor. Working hard to support themselves and their families. Most of their employment and income generating opportunities are created by very small family businesses. Informal, diversified family businesses. Unregulated, unregistered, untaxed, unnoticed family businesses. Profitable family businesses. Family businesses without access to formal financial services. Families without access to formal financial services. This is the foundation of most developing country economies. This, the unbanked majority, is also the potential market for microfinance.
More accurately, this provides the potential markets for microfinance services. Not a single market, but many markets. Populations are diverse. Needs differ by location, economic activity, and priorities. Some potential clients are accessible, others are not. Rural environments differ dramatically from urban markets. Cultural norms and social values are rich in their diversity. Commerce has a different cash flow profile than manufacturing or handicraft production. Farming and livestock activities have yet another economic profile. Household savings accounts are different from business transaction accounts. Provision of funds transfer facilities requires a special financial infrastructure.
A multiplicity of markets requires a variety of institutional models for serving these markets. The five major microfinance institutional models, ranked by scope of impact and sustainability of operations, are as follows: full service commercial bank; restricted service bank; regulated non-bank financial institution; membership society; and nongovernmental organization (NGO)/project. The remainder of this paper will focus on the future of microfinance via the first three models, namely some form of regulated financial institution, as these are the models that offer the greatest potential for maximizing the scale, scope, and longevity of impact.
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