Should Government Be Involved in Microfinance?

Government may get involved in microfinance with—or as—retail providers at the micro level, with financial infrastructure at the meso level, and with policy and legislation at the macro level, according to Timothy Lyman of the Consultative Group to Assist the Poor. But among the three options, the micro level shows a long history of government-delivered retail credit targeting the world’s poor, said Lyman, one of the panelists discussing government involvement during the second annual Chicago Microfinance Conference April 21 at Gleacher Center.

“It turns out that the risk of political interference—that lending will be used as a tool for political patronage—is often too great,” he said. “What kind of policymaker wants to be responsible for rigorous loan collection? The result is usually poorly managed programs that benefit the influential few and tend to pollute the market for private players who are trying to operate according to best-practice principles.”

The more government intervenes in microfinance, the more difficult it will be to find a scalable model that can be implemented en masse, said Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance. “You want to leave to the market the maximum amount of flexibility,” Zingales said. “In the microfinance world, you’ve seen a lot of the little experiments, some of them successful and some of them not so successful. But the potential is enormous if we can transform the better models into mass production.”

Despite the successes of microfinance, two-thirds of the world’s population—4 billion people—live or work in an informal, underground economy, said Cate Ambrose, chief for advocacy and external relations for the High Level Commission on Legal Empowerment of the Poor. “Speaking personally rather than on behalf of the commission, it’s hard for me to imagine that microfinance will have decisive, long-term impact on poverty in the absence of policies that also address informality,” Ambrose said. “So many people seem to be living well informally. Sometimes it’s very hard to make a case for those who are not living in extreme poverty. We have to identify the upside of living in the formal economy.”

Goanpot Asvinvichit, president and CEO of Government Savings Bank of Thailand, said microfinance reforms need to focus more on the underground economy than inflation, for example. “Although they participate in economic activity, many people who have not yet gained access to the formal banking system are members of the underground economy,” Asvinvichit said. “In a developing country like Thailand or other countries, we are just trying to convert the informal into a more formal economy.”

—Phil Rockrohr