A Survey on Microfinance for Developing Countries: A Social Responsible Investment Opportunity

Abstract:     
This survey reviews some of the main aspects of microfinance in underdeveloped countries, describing why it has succeeded in reaching the poor, while traditional banks haven't, using innovative devices such as group-lending with self monitoring, short repayments instalments and small loans.

Well known governance problems, such as adverse selection, moral hazard and strategic default are analyzed within the microfinance context, together with synergic products such as microdeposits and insurance.

The high interest rates paradox is another distinctive issue of microfinance and evidence shows that subsidized credit might worsen the situation.

The classic trade-off between maximum outreach to the destitute and financial sustainability is related with a growth evolutionary pattern from subsidized NGOs to commercial banks, together with proposals for improving impact, using also lending sources from socially oriented international funders, who might even look for a reasonable risk-return profile.

Innovative questions and proposals are illustrated, so as to give an updated and synthetic picture of the state of the art, which might prove useful for researchers and practitioners.

Number of Pages in PDF File: 56

Keywords: Microfinance, poverty alleviation, lending innovations and governance, outreach and sustainability

JEL Classification: G21, H81, I30, L31, O19

working papers series