Microfinance and Poverty Alliviation

Should microfinance institutions specialize in financial services?

Robert Lensink
Faculty of Economics and Business, University of Groningen, Development Economics Group, Wageningen University, The Netherlands.
E-mail: [e-mail]
Roy Mersland
Faculty of Economics and Social Sciences, School of Management,
University of Agder, Kristiansand, Norway
Vu Thi Hong Nhung
Faculty of Economics and Business, University of Groningen
Email: [e-mail]

Abstract
Using a global data set of microfinance institutions (MFIs) in 61 countries, this study tests whether those that specialize in financial services perform better in terms of financial returns and/or outreach than those that provide both financial and nonfinancial (i.e., business development and social) services. The results suggest that MFIs that provide social services perform better in terms of reaching out to poorer customers but worse in their financial results. With regard to business development service providers, their performance is similar to that of MFIs that specialize in financial services.

Keynotes: Microfinance; Business development services; Outreach; Financial sustainability; Random effects regressions.

JEL codes: G21; O16; C23.
The impact of microfinance, defined as the provision of financial services to poor populations, has become a hotly contested subject. It enjoys widespread appeal as an antipoverty tool; however, many questions regarding its actual influence remain unanswered (Hermes and Lensink, 2007). Key controversies relate to whether suppliers of microfinance should follow a minimalist approach, providing microfinance only, or should provide microfinance alongside other important social services, in a sort of “microfinance-plus” [pic](Bhatt and Tang, 2001; Morduch, 2000).

Initially, microfinance institutions (MFIs) focused on providing small loans and microcredit. The industry soon started to recognize though that the poor needed a wide variety of

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