Institutional Financial Self-Sufficiency (IFS) is necessary for a Microfinance Institution (MFI) to reach and benefit truly large numbers of the poor and poorest households in order to obtain the large amount of funds required. There is no necessary trade-off between serving large numbers of the poorest households and the attainment of IFS by an MFI. This is proven by the achievements of the MFIs in Asia, Africa, and Latin America used as case studies in this paper.
Cost-effective identification of the poor and the poorest women is essential to maximizing the effectiveness and efficiency of providing microfinance services to them. If the service is not exclusively for the poor and the poorest, it should be operated separately for them to minimize leakage to the non-poor.
Efficient microfinance for the poor and poorest, through detailed business planning, timely and accurate monitoring of performance, and maintenance of loan portfolio quality through attractive client and staff incentives, should maximize the funds reaching them. The needs of the poor and poorest women for financial services must be known in depth and the financial products and delivery system designed specifically to satisfy them.
The cost of efficient microcredit to the poor and poorest will vary between 35% and 51% of their average loans outstanding, depending on the conditions under which it is provided. Most of this (50% to 70%) goes to pay the field staff that deliver the financial services to poor women in their villages, the only way they can be reached by microfinance. The poor and poorest women in Asia, Africa, and Latin America are proving that they can and will pay the required cost of this opportunity to reduce their poverty and provide a better future for their children. This is made possible by the impressive returns to their microenterprises, which normally average more than 100%.
Governments, having universally failed to provide sustainable access to microcredit for the poor and the poorest, should provide a supportive policy and regulatory framework for efficient private initiatives to do so. At a minimum, this requires removal of any interest rate caps on doing business with the poor and provision of a suitable legal identity (and regulation) for MFIs working with the poor and the poorest women. Under these circumstances, commercial banks should be interested in funding microfinance for the poor and poorest, thereby removing the final constraint to its expansion. In these ways, microfinance for the poor and the poorest women can be mainstreamed and world poverty reduced significantly.