Which financial services are most valuable to the poorest?

Credit is just one useful financial service, but credit has been the first focus of microfinance institutions because there’s a business model that makes lending possible, not because it is necessarily most important for customers. Customers pay handsomely for access to credit. Regulations also often make it much easier to lend than to take deposits (since the risk rests with the lender).

Saving programs have emerged, and some advocates now claim that deposit services deserve claim to being the most fundamental need for poor families – and for the poorest specifically. But the picture developed by Collins et al (2009) pushes against that view. We argue that a range of financial devices are sought and used together, with different degrees of substitution and complementarity. None have clear primacy.

Programs in locales around the world have experimented with a variety of “credit plus” offerings (notably credit with education) to target poorer populations with mixed results and only recently have a few methodologically sound studies begun reporting evidence. We are just beginning to shine a light on what combination of services, financial and otherwise, will help the poorest build assets and “graduate” into more standard microcredit and other financial products. 

One concern is that the optimal mix may not be commercially viable. The costs of building groups, disbursing, collecting and monitoring may overwhelm the return on very small loans at even the highest viable interest rates—and certainly if interest rates are lowered to maximize social impact.

Microfinance has always been a balancing act in which economic reality is balanced against expanding the social good.  But making the right choices also necessitates stepping away from economic reality to assess what could be optimal in a less constrained world.

The series has been compiledas a framing note on the FAI site and will be published later as part of a collection of studies in a forthcoming book.