Microfinance Institutions in the Development of Financial Markets

This paper addresses the issue of high expectations raised by microfinance and attempts to answer the following questions:

• Has the era of commercial microfinance begun?
• Do institutional innovations in building microfinance institutions (MFIs) have the potential for making the microfinance promise come true on a bigger scale?

The paper stresses that institutional innovation is required if the rare successes are to be reproduced on a larger scale. It classifies institutional options for building MFIs into upscaling, downscaling and the founding of greenfield banks. It offers preliminary insights and empirical evidences to validate the potential of the latter two options as new institutional alternatives vis-à-vis upscaling.

Further, the document provides a theoretical basis for:

• Identifying institutional characteristics of the three approaches;
• Preliminary listing of their potential advantages and drawbacks.

Finally the paper concludes that:

• Most of the success of greenfield banks is attributable to the special economic situation of the transition countries;
• The downscaling projects indicate a long journey for microfinance to provide win-win solutions;
• The new institutional model of greenfield banks might produce new institutional issues.