Challenges to Microfinance Commercialization

The paper discusses some of the challenges to microfinance commercialization, such as inappropriate donor subsidies, poor regulation and supervision, and limited management capacity of microfinance institutions.

The paper highlights that the obstacles or challenges in building a sound commercial microfinance industry include:

• Inappropriate donor subsidies characterized by continued subsidization of the industry.
• Poor regulation and supervision of deposit-taking MFIs: Developing countries are often accused of poor regulation and supervision of the formal financial system;
• Operation of most microfinance institutions as nonprofit nongovernmental organizations (NGOs). These NGOs are not regulated financial institutions and therefore are usually not permitted to mobilize client savings;
• Limited management capacity in MFIs: Since many of the MFIs begin as NGOs with a social mission to reduce poverty through provision of loans, few MFIs have the management capacity to successfully manage a commercial financial intermediary;
• Institutional inefficiencies in terms of high operational costs;
• Need for more dissemination and adoption of rural, agricultural microfinance methodologies.