Microfinancial Sector Assessment and Development

A microfinance institution (MFI) is an organisation which provides financial services to clients who are poorer and more vulnerable than traditional bank clients. Relevant studies have pointed out the importance of the macroeconomic environment for MFI outreach, additionally to institution-specific characteristics. MFIs attempt to fulfill a dual objective (reach the unbanked poor and become self-sustainable institutions). This has created a debate as many support that MFIs lose their original mission (focus on the poor). Several methods have been established regarding research methods and techniques for financial sector analysis (a crucial process in microfinance where update data should be gathered in order to be assessed in a proper way). The most commonly used are: ratio analysis; performance measurement; budgeting systems; cost-benefit analysis; forecasting; and risk management. The impact assessment of the microfinance sector is examined through Randomised Controlled Trials (RCT), where there is an isolation of the effect of a chosen innovation by assigning a random selection of individuals or villages to the innovation (the treatment group), and another equivalent selection of individuals or villages to maintain the status quo (the control group). Regulatory framework and the government’s role is of utmost importance in promoting greater access to financial services to low income people, and improving the quality of those services. The aim is to see more clients overall, and very poor people in particular, served with appropriate, varied products from a variety of institutions. However, many MFI clients prefer to spend money on goods consumption rather than in investments. This is a problem that all involved parties (industry practitioners, regulators, policy makers and all other concerned stakeholders within the Microfinance Industry) should examine carefully and try to find solutions to it as soon as possible.