Transforming Microfinance Institutions: Providing Full Financial Services to the Poor (review)

The volume's fifteen chapters, written by the co-authors, each of whom is an experienced development professional, and six other highly qualified development scholars and practitioners begins with a statement and two related questions that are at the core of the study: "The microfinance industry (MFI) has seen impressive growth for longer than a decade and yet still reaches only a small percentage of its potential market world-wide. How do we reach those still unbanked? What steps can we take to make microfinance available to more people and do so on a lasting basis and, as well, provide them with the financial services they need other than just credit?" (p. xv).

The book's four parts combine to provide thoughtful responses to the questions posed by the co-authors. Part one examines the basic principles underlying the generation of savings and their mobilization into investments. The examination is conducted from three analytical and policy perspectives: institutional, regulatory and macroeconomic. Part two delves further into issues associated with the regulatory and general institutional framework within which deposit-taking (savings generation) takes place. The third part focuses on transforming MFIs where, for the purposes of the book, "transformation is defined as the process of a credit-focused MFI … creating or becoming a regulated deposit-taking financial intermediary. An intermediary is an institution that mobilizes deposits and then on-lends these deposits to its borrowing clients" (p. xxviii).

The fourth part contains two case studies summarizing Uganda's experience in developing laws, regulations and licensing agreements that oversee deposit-taking microfinance institutions. They (a) chronicle the development of Uganda's policies towards improving microfinance regulation and supervision; (b) review the key success factors upon which improvement is based; and (c) identify the remaining challenges that impede further improvement in the way that the country's microfinance sector functions. The case studies are followed by an interesting and useful appendix that offers fifteen steps in the institutional processes of mobilizing savings and generating of investments. The steps begin with studying savings demand to investing excess liquidity, and appropriate sequencing is crucial to achieving success in the process of deposit-taking and on-lending.

The Ugandan cases are interesting and useful, but for readers who focus their attention on Asia it would have been useful to supplement the volume by examining a case study "closer to home". Examining the history, structure, and activities of the Vietnam Bank for Social Policies (VBSP) as an MFI, for example, would be an appropriate supplementary study. It was initially called Vietnam Bank for the Poor (VBP) when the government created it in January of 1996. The VBP was designed to provide relief to poorer and underserved depositors and borrowers (who often had no choice but to borrow from local money lenders). The result often was huge debts due to exorbitant interest rates because the poor could not obtain loans on a commercial basis from regular microfinance institutions. As an MFI, the Bank stepped in by operating more than 500 branches, mainly in rural areas, as well as 1,500 smaller outlets belonging to the country's Bank for Agriculture. Their deposit-taking and on-lending clients were mainly Vietnam's rural poor.

When the VBSP came into being in 2003 it expanded upon its predecessor institution's focus by extending its activities to include providing preferential credit to poor households, poor students, rural and urban job-creating activities, needy migrant workers and both households and business ventures. The VBSP has worked reasonably well but similar to virtually every MFI it continues to face the challenge of maintaining profit levels necessary to ensure survival. This could mean either raising loan rates or reducing deposit rates. Within the context of meeting this challenge, the VBSP continues to maintain a commitment to serving the unbanked poor by broadening their access to banking services and, in this effort, the Bank is assisted via technical expertise provided by...