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Responsible Consumer Lending

Early pioneers of the microfinance movement touted it as a vehicle to promote entrepreneurship and subsequently provide a pathway for poverty alleviation. However, financial diaries research such as that published in Portfolios of the Poor, shows us that microloans have multiple purposes beyond spurring small‐scale enterprises. The poor have myriad expenses beyond their business endeavors such as health care costs, school fees, housing repairs, and unexpected emergencies. Consumer lending is one possible tool to help the poor cope with their (often unpredictable) consumption financing needs. However, it may not be the appropriate solution in all instances and also carries the risk of encouraging over‐ indebtedness and financing for “bad” consumption, such as to buy aspirational material goods. 

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Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?

For microfinance institutions, particularly those aiming to take deposits, an advantage of regulation is that it allows semi-formal institutions to evolve more fully into banks. But complying with regulation and supervision can be costly, creating potential trade-offs. World Bank researchers Robert Cull and Asli Demirgüç-Kunt and FAI managing director Jonathan Morduch examined the balance between the benefits and costs of regulatory supervision, with a focus on institutions’ profitability and outreach to small-scale borrowers and women. The authors analyzed data on 245 of the world’s largest microfinance institutions, with newly-constructed data on their prudential supervision. Regression analysis showed that supervision does not have a significant impact on profitability: microfinance institutions subjected to more rigorous and regular super- vision are not less profitable compared to others. However, this type of supervision is associated with larger average loan sizes and less lending to women, suggesting that it does have a significant impact on outreach.