Financial inclusion beyond Microfinance

By Usha Thorat

Excerpts from a speech delivered by Usha Thorat in Kuala Lumpur on April the 5th at an event co-sponsored by CGAP OECD AFI and Bank Negara. Usha Thorat is the Director, Centre for Advanced Financial Research and Learning.

financial inclusion policy makers forum

The challenge in microfinance lies in taking advantage of economies of scale and passing on the benefits to the customer while providing a reasonable return to the investor.

Financial inclusion is more than microfinance. Microfinance has shown how the poor are credit-worthy, how through regular savings and loan repayments, using group solidarity or guarantee, they have alleviated distress amongst low-income households, enabled consumption smoothening and facilitated self-employment and micro-enterprise.

For borrowers who only had recourse to moneylenders and loan sharks, microfinance provided access to formal sector finance with very little formality and documentation. The MFIs have demonstrated innovative methods and technology to enhance outreach and attract equity which could be leveraged to make further investments to enhance coverage. They have been able to reach the last mile that banks have found difficult.

The number of loan accounts serviced by MFIs in India increased from 10 million in 2007 to nearly 27 million in 2010 while loans outstanding increased from $840 million to $4 billion.

On the other hand, the critics of microfinance have argued that the interest rates are too high and investors in such MFIs have obtained huge returns on their equity. Grameen Bank Founder Muhammed Yunus would argue that financial services to the poor cannot be rendered by profit-oriented enterprises. Others would argue that unless there are profits to be made, there can be no sustainable scale-up of business so as to cover the unreached and excluded.

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