Microfinance Focus, June 10, 2011: United Kingdom’s All-Party Parliamentary Group on Microfinance has released its report ‘Helping or hurting: what role for microfinance in the fight against poverty?’ claiming that the donor community needs to play an instrumental role in refocusing the industry.

The report says that the donors’ approach to commercial microcredit needs to change dramatically. Stressing on the need to recognize the limitations of this intervention and the abuses that have in some cases been committed in the name of microfinance, the report argues that more effective and appropriate regulation (not necessarily simply more regulation) and oversight of commercial MFIs is needed, including the establishment of credit bureaux to help reduce cases of over-indebtedness.

Donors should not support commercial MFIs with loan-fund capital, but could play a critical role in offering financial and technical support to partner countries in order to develop better regulatory systems and institutions for commercial and not-for-profit MFIs alike, the report says.

The report further suggests that investors should ensure that sufficient information and research is produced by the MFI or fund in order to judge the social impact of the investment. It has recommended CDC to develop an investment code for commercial microfinance.

The authors have advocated enforcing independently verified social performance monitoring (SPM) systems on all MFIs that are supported by donors in order to clearly demonstrate their impact on poverty. Donors need to offer capacity-building support, funds for product innovation conditioned on including SPM.

Commercial microfinance providers are mostly providing microcredit with little flexibility. Their repayment plans often lacks any account of specific cashflow needs of the business.  The report shows that much of the commercial microfinance sector is following the profitable model of ‘widening’ access to a very limited range of financial services rather than ‘deepening’ it and truly developing a more inclusive financial system.

The All-Party Parliamentary Group on Microfinance, established by Annette Brooke MP in 2002, is a UK forum for Parliamentarians, practitioners, academics and non-governmental organisations interested in microfinance.