Microfinance and Poverty Alliviation

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Should microfinance institutions specialize in financial services?

Robert Lensink
Faculty of Economics and Business, University of Groningen, Development Economics Group, Wageningen University, The Netherlands. E-mail: B.W.Lensink@rug.nl
Roy Mersland
Faculty of Economics and Social Sciences, School of Management, University of Agder, Kristiansand, Norway
Vu Thi Hong Nhung
Faculty of Economics and Business, University of Groningen
Email: t.h.n.vu@rug.nl

Abstract
Using a global data set of microfinance institutions (MFIs) in 61 countries, this study tests whether those that specialize in financial services perform better in terms of financial returns and/or outreach than those that provide both financial and nonfinancial (i.e., business development and social) services. The results suggest that MFIs that provide social services perform better in terms of reaching out to poorer customers but worse in their financial results. With regard to business development service providers, their performance is similar to that of MFIs that specialize in financial services.

Keynotes: Microfinance; Business development services; Outreach; Financial sustainability; Random effects regressions.

JEL codes: G21; O16; C23.
The impact of microfinance, defined as the provision of financial services to poor populations, has become a hotly contested subject. It enjoys widespread appeal as an antipoverty tool; however, many questions regarding its actual influence remain unanswered (Hermes and Lensink, 2007). Key controversies relate to whether suppliers of microfinance should follow a minimalist approach, providing microfinance only, or should provide microfinance alongside other important social services, in a sort of “microfinance-plus” [pic](Bhatt and Tang, 2001; Morduch, 2000).

Initially, microfinance institutions (MFIs) focused on providing small loans and microcredit. The industry soon started to recognize though that the poor needed a wide variety of financial products to improve their lives, such that microcredit evolved into microfinance. The term refers to a broad set of financial services, including loans, savings, insurance, and transfer services, as well as remittances aimed at low income clients. Conventional wisdom suggests that poor households benefit from a combination of these services, rather than just the provision of credit (Aghion and Morduch, 2005). Some MFIs thus began to broaden their activities even further, providing financial services as well as business training, health care, and social services. These so-called “plus” activities acknowledge that though financial services are critical to microfinance, they address only one of the many problems of the poor. For example, the poor have comparatively high disease rates, and few know how to use borrowed funds efficiently. In such conditions, microcredit is insufficient.

Most studies in this field analyze the trade-off between serving the poor and financial sustainability [pic](Cull et al., 2007; Hermes et al., forthcoming). To the best of our knowledge, the question of whether specializing in financial services or integrating financial services with nonfinancial services is better for financial sustainability has not been tested empirically. We take up the challenge by comparing microfinance-plus providers, which offer nonfinancial services, and specialized MFIs, which focus only on financial services, according to their financial results and outreach to the poor. As an added contribution, we compare financial performance and outreach across two types of plus services: business development services (BDS) and social services.

The remainder of this article proceeds as follows: We outline the concept of microfinance-plus in the next section, followed by our conceptual framework of the impact of these plus services. From our empirical literature review, we derive some hypotheses; we then describe our data and methodology for testing these...
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