Surveys of Theory, Evidence and Policy
Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde
Thankom Arun, David Hulme, Imran Matin and Stuart Rutherford1 1. INTRODUCTION Since the 1980s, microﬁnancial services have generated considerable interest among academics, donors and development practitioners as an alternative to the documented failures of government rural credit assistance to reach lowincome households (Hulme and Mosley, 1996; Johnson and Rogaly, 1997). The failures are attributed to causes such as urban biased credit allocation, higher transaction costs, interest rate restrictions, high default rates and corrupt practices. The reasons for poor loan recovery are related to inappropriate design features, leading to incentive problems, and politicization that made borrowers view credit as political largesse (Lipton et al., 1997). These failures stimulated a set of innovative ﬁnancial institutions in several corners of the world which began to prosper and attract attention, especially in Bolivia, Bangladesh and Indonesia. These microﬁnance institutions (MFIs) share a commitment to serving clients that have been excluded from the formal banking sector. The development of the microﬁnance sector is based on the assumption that the poor possess the capacity to implement income-generating economic activities but are limited by lack of access to and inadequate provision of savings, credit and insurance facilities. This approach also breaks from the directed credit strategies by reducing the government involvement and by paying close attention to the incentives that drive efﬁcient performance (Morduch, 1999). The developments in microﬁnancial services have been based on a prototype delivery model that is considered the best answer to capture ﬁnancial needs of the poor in...
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