Moral considerations can hamper scaling up of Microfinance

March 12, 2008

In the Financial Time of March 3d, the Centre for the Study of Financial Innovation urged microfinance organization (MFIs) to raise standards of management and governance. MFIs could do worse than to take notice. May I propose one, slightly less peaceful, bit of advice to it: Stick to your guns.

With the small loan sizes involved, economies of scale are crucial in order to bring costs and, ultimately, interest rates down. Those MFIs that succeed in doing so become magnets for many in the development community who hope to use the them as platforms to propagate a plethora of development goals. At the business school IESE's "Doing Well by Doing Good" conference two weeks ago, Pamela Hartigan, ex CEO of the Schwab Foundation, advocated wider developmental goals for MFIs. However well intended, turning MFIs into development conglomerates more or less guarantees the same outcome as for traditional business conglomerates: barring the few that outpace the market, the majority of conglomerates lag it. Adding more developmental work to MFIs may be good for the very few that they can serve but is bad for the many more left unserved because of it.

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