Pros and Cons of Integrating Non-Financial Services in Microfinance

Introduction

Microfinance emerged in the late 1970s when Muhammad Yunus began offering small loans to the ‘unbankable’ poor in Bangladesh. Initially, the microfinance movement promoted “specialization”. For instance, Yunus, in Banker to the Poor, (2007) stated: “Rather than waste our time teaching them new skills, we try to make maximum use of their existing skills. Giving the poor access to credit allows them to immediately put into practice the skills they already know” (Yunus, 1998).

This idea of capitalism at its best was endorsed by many researchers and also international organizations. The main point argued was that the poor do not need anything else than credit. If you give them credit, everything will be fine. However, several recent studies have suggested that the impact of microcredit has been considerably overstated (Roodman, 2012). Moreover, there is no rigorous evidence that microcredit positively affects wealth indicators like income and/or consumption (Angelucci, Karlan, & Zinman, 2015; Armendáriz & Morduch, 2010; Banerjee, Duflo, Glennerster, & Kinnan, 2015; Karlan & Zinman, 2011). These findings seem to imply that single microcredit solutions may be an inadequate way to confront the prevalence of poverty. Poor households benefit from a combination of services, rather than the simple provision of credit (Armendáriz & Morduch, 2010). Since poverty is multidimensional, the poor need access to a coordinated combination of microfinance and other developmental services, in order to overcome their poverty (Khandker, 2005). However, many microfinance institutions (MFIs) prefer a minimalist approach focused on providing financial services. Several policy makers argue that the only way for MFIs to become self-sufficient, obtain sustainability and reach optimal scale is to concentrate on financial services (Dunford, 2002; Otero, 1994).

In the late 1970s and early 1980s, the provision of financial services like micro-credit, micro-saving and micro-insurance (mostly micro-credit) to micro-entrepreneurs was done alongside nonfinancial services (social and business development services) (Goldmark, 2006). Such developmental services are expected to make credit usage more productive. The arguments for the importance of the microfinance “plus” (maximalist) approach are supported by several studies documenting improved clients’ impact when accessing credit in combination with nonfinancial services or ‘‘plus’’ services (Copestake, Bhalotra, & Johnson, 2001; Dunford, 2002; Halder, 2003; Karlan & Valdivia, 2011; McKernan, 2002; Noponen & Kantor, 2004; Smith, 2002). Moreover, nonfinancial services can make substantial, positive contributions for not only microcredit users, but also NFS providers and MFIs in general. Such outcomes may relate to the quality and types of NFS. Those which have focused on vocational skills training and market access add more benefits to both clients and MFIs than traditional management training (Sievers & Vandenberg, 2007). Moreover, due to critique of subsidies to MFIs’ sustainability, donors are recently in favour of “smart subsidies” to maximize both economic and social outcomes for MFIs and their clients. There are arguments to support the idea that long-term subsidies may be better used in integrated credit models, which provide health and training services for clients alongside financial services (Armendáriz & Morduch, 2010).