Microfinance institutions in the development of financial markets

For the last two decades, microfinance has ranked high on
the list of policy instruments for fighting poverty. Supporting
the creation of access to formal financial services for low-income
households holds out the promise of improving the
living conditions of poor families and fostering economic
development. Furthermore, it is claimed to be a very cost-effective
approach because some non-governmental
organizations (NGOs); that have been upscaled into
microbanks have shown that financial services can be offered
to low-income households while covering costs and even
earning a moderate profit. Recent studies, however, are
sceptical about the high expectations raised by the
microfinance approach, since profitable microfinance
institutions (MFIs); are the exception rather than the rule.
Institutional innovation is called for in order to reproduce
these rare successes on a larger scale. This article aims to
offer preliminary insights into the potential of two rather
new institutional alternatives to upscaling: the creation of
microfinance departments at existing for-profit banks (i.e.,
downscaling); and the founding of greenfield banks.