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Edited by David B. Audretsch, Oliver Falck, Stephan Heblich and Adam Lederer
Chapter 10: Institutional Impact on the Outreach and Profitability of Microfinance Organizations
Kathy Fogel, Kevin Lee and William McCumber INTRODUCTION In 2006, Dr Muhammad Yunus shared the Nobel Peace Prize with the institution he founded, Grameen Bank, a microfinance organization and community development bank in Bangladesh. More than three decades after its founding, formalized microfinance (as opposed to traditional, often predatory, money-lending) has expanded to hundreds of countries by way of thousands of institutions, all extending financial services to the traditionally underserved, whom we call the ‘non-banked’, especially the rural poor and micro-entrepreneurs. As microfinance organizations continue to grow and expand their services, various forms of organizational structure emerge. Some remain purely philanthropic, relying on governments and NGOs for funds. These organizations focus on reaching the poor; loan performance is a lesser concern. Others introduce funds from the private sector and gradually move away from the micro-loan models and shift resources toward larger loans. Yet many others aspire to strike a subtle balance between profitability and outreach, aiming at financial self-sustainability while providing needed social services to the poor. The organizational structure chosen by a microfinance institution largely depends on the community it serves, which has its unique social characteristics, including cultural heritage and popular values, commonly referred to as ‘informal institutions’, and legal rules, government effectiveness, and regulatory environment, known as ‘formal institutions’. This chapter attempts a first-pass analysis to understand the impact of formal and informal institutions on the success of microfinance institutions. We are interested to see how a microfinance organization’s external environment affects its profitability and outreach goals....
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