Sustainable Banking with the Poor. MICROFINANCE HANDBOOK. an Institutional and Financial Perspective

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Joanna Ledgerwood (Ed.), Sustainable Banking with the Poor. MICROFINANCE HANDBOOK. An Institutional and Financial Perspective. The World Bank, Washington, D.C. 1999. ISBN 0.8213-4306-8 (286 pages)

Numerous attempts are currently being made in various parts of the world to create concrete alternatives for promoting microfinancing and microcredit supply through the development of 'institutional solutions' designed to achieve this goal. Programs and projects created to help micro entrepreneurs and distribution of microcredit differ in their organizational forms and structure. Often these credit organizations operate within a specific institutional environment. However, institutions and institutional changes are difficult for most people to grasp and frequently confused with organizations and organizational changes.

The main purpose of the Microfinance Handbook is to "bring together in a single source guiding principles and tools that will promote sustainable microfinance and create viable institutions" (p.1). Further on the Handbook states that "...both donors and practitioners need to understand how microfinance institutions operate". This is a very pertinent issue and definitely not so easy a task.

Let me start by turning to footnote 1 that says: "The term 'microfinance activity' is used throughout to describe the operations of a microfinance institution, a microfinance project, or a microfinance component of a project. When referring to an organization providing microfinance services, whether regulated or unregulated, the term 'microfinance institution' (MFI) is used". From this footnote, we are led to believe that organization and institution are one and the same. The confusion arises because there is no clear-cut distinction made between 'institutions' and Organizations'. It regards organizations providing microfinance services as 'microfinance institution' and alludes to the fact that this microfinance institution is a sub institution that exists within a larger institutional framework that is taken up on pages 12-13. An analysis of microfinancing must be "based on an understanding of the different risks and of the country's legal and institutional framework" (page 22). The fact that there are NGOs entering the scenario complicates our understanding of local institutions even more - these NGOs are formal institutions in the sense of their internal rules and laws that govern them. They are also informal institutions in the sense that they are not regulated by the formal financial institutions of a country. Therefore, they are termed as 'semiformal institutions'. The handbook further adds on page 16 that; "microfinance organizations should be aware of the services offered by other MFIs and the effects they may have on the effective delivery of financial services". From the above reading we are led to understand that institutions provide services. Do institutions provide services or do they provide 'incentives' that facilitate the provision of services? What does the handbook mean by "institutions"?

Chapter 4 of the handbook defines an institution as "a collection of assets - human, financial and others - combined to perform activities such as granting loans and taking deposits overtime... Thus by its very nature institution has a function and a certain permanence" (page 93). It then identifies a 'range of institutional types': formal, semi-formal and informal structures. On page 97 the handbook further states that each institutional type includes its suitability as a partner to a donor, international NGO, or government. Public and private development banks, savings and postal banks, commercial banks and non-bank financial intermediaries are all classified as 'formal institutions'. Credit unions, savings and loan cooperatives, other cooperatives and NGOs are clubbed as 'semi-formal institutions'. While still others are regarded as 'informal financial providers' (generally not referred to as institutions) (pages 97-106). …