Financial Sector Policy and the Poor

This paper studies the role of the financial sector in reaching the poor. It argues that strong mainstream financial systems have a positive impact on economic growth and poverty reduction; while microfinance serves the poor, to achieve broad-based acceleration of national economic growth, an effective mainstream financial system is needed.

The paper highlights the following aspects to support its arguments:

• Penetration of microfinance is skewed and is too small to threaten the mainstream financial system;
• The points of difference between the two are in terms of:
  • Scale microfinance institutions (MFIs) have limited geographical coverage, loan size and risk pooling;
  • Subsidy - MFI sector remains heavily grant and subsidy dependent, which is an unsustainable practice;
  • Style - The delivery mechanisms are diverse and unique within the microfinance sector. However MFIs have to resort to a business model similar to mainstream financial intermediary to be profitable.
• Due to lack of reliable estimates, the actual impact of microfinance on poverty is not available;
• An effective financial system can make a sizable contribution to enhancing the average national prosperity.

The paper also discusses the need for the poor to be served by the financial sector. It presents the following concluding remarks:

• Emphasis on the financial sector is a crucial component of a balanced pro-poor development;
• Both microfinance and mainstream financial development are needed, and should be complementary.