MICROENTERPRISE FINANCE - IS THERE A CONFLICT BETWEEN GROWTH AND POVERTY ALLEVIATION

Microenterprise finance has generated enormous enthusiasm among aid do nors and nongovernment organizations (NGOs) as an instrument for reduc ing poverty in a manner that is financially self-sustaining. Although something of a consensus has emerged concerning the principles by whic h such institutions should be designed, however, we know little about their impact. The paper reports on a research project which estimated the impact of 13 microfinance institutions in seven developing countri es on poverty and other target variables, and attempted to relate such impact to the institutions' design features. For each of the institut ions studied, the impact of lending on the recipient household's incom e tended to increase, at a decreasing rate, as the recipient's income and asset position improved, a relationship which can easily be explai ned in terms of the greater preference of the poor for consumption loa ns, their greater vulnerability to asset sales forced by adverse incom e shocks and their limited range of investment opportunities. There ar e significant outliers to this general pattern (in particular, very po or people who have been able to achieve significant loan impact); but they are the exception rather than the rule, and the relationship is s ignificant at the 1% level for all the institutions studied except the Malawi Mudzi Fund. This relationship defines, in the short term, an ' 'impact frontier'' which serves as a tradeoff: lenders can either focu s their lending an the poorest and accept a relatively low total impac t on household income, or alternatively focus on the not-so-poor and a chieve higher impact. The position and slope of the estimated impact c urve vary however with the design of the institution: for ''well-desig ned'' schemes impact, at all levels of income, is higher than for ill- designed schemes. Hence for many lender institutions the tradeoff can often be moved by appropriate innovations in institutional design, in particular modifications to savings, loan collection, and incentive ar rangements for borrowers and staff. (C) 1998 Elsevier Science Ltd. Al rights reserved.