Cranfield School of Management

Microfinance is the provision of small scale financial services to those with no access to formal financial services, including credit, savings and insurance. Lack of access to basic financial services is often income related in the sense that low income households are considered by banks and other providers of formal financial services too risky and too expensive to service. However, poverty is not the only factor that may result in exclusion from formal financial services. Rural households in remote areas in places where the infrastructure is poor and some groups within society such as women in certain cultures, also often find themselves excluded from basic financial services.

The person most commonly associated with microfinance is professor Muhammad Yunis who set up Grameen Bank in Bangladesh in the late 1970s and was awarded the Nobel Peace Prize in 2006 for this contribution. Initially Grameen Bank focused on providing microloans to women in rural Bangladesh by utilising the joint liability lending technique to overcome problems such as lack of collateral due to which formal banks were unwilling to provide credit to the target clientele. Since then Grameen Bank has grown and expanded, as has the microfinance industry which today delivers a range of financial services including micro-saving, micro-insurance and housing loans using a range of innovations and techniques.

In June 2011 the All-Party Parliamentary Group on Microfinance, a leading UK forum, has published a report on the role of microfinance in the fight against poverty. This followed increasing concerns about the actual contribution of microfinance - and particularly microcredit - to the alleviation of poverty. In the Indian state of Andhra Pradesh for example, rules were recently adopted to regulate micro¬lenders, after their aggressive debt-collection tactics were blamed for a wave of suicides.
Indeed, the growth and popularity of the microfinance industry raise important questions relating to how the performance of microfinance providers should be evaluated. This is my area of research and it is important given the value of public funds diverted from alternative uses to supporting microfinance institutions as well as the large donations from which the industry has traditionally benefited.

The debate around the topic of performance measurement spans 5 key issues: (1) the search for an adequate measure of financial sustainability; (2) the trade-off between outreach and sustainability which are the two primary performance assessment criteria; (3) the question of how to determine the opportunity cost of concessionary borrowings in measuring the subsidy dependence of microfinance institutions; (4) the conceptual framework of performance assessment; and (5) the integration of micro-saving and other services into performance assessment and subsidy dependence measures.
The microfinance industry is unique within financial innovations because it is one of very few - if not the only - financial innovation which originated in emerging markets to be adopted later by developed economies, albeit to a lesser degree. Certainly the recent realisation of the profit potential of providing micro financial services has not escaped the big banks, many of which now offer micro financial services. Furthermore, whilst for a long time it had been seen as a non-core financial topic within financial academia, microfinance - like behavioural finance - is increasingly being accepted as a bona-fide financial topic to study and research. Likewise in terms of teaching, microfinance has also much to offer. In particular the problems that surround microfinance lending, for example, are nothing but an acute case of the problems of lending in general such as asymmetric information, moral hazard and the role of collateral.