THE ROLE OF THE STATE IN PROMOTING MICROFINANCE INSTITUTIONS

In a context of liberalized financial systems, microfinance allows millions ofhouseholds, usually excluded from classical financial services, to begin or reinforce theirown activities and become microentrepreneurs. Yet, in spite of the success of numerousmicrofinance institutions (MFI), many difficulties remain which must be urgentlyresolved in view of their ambitious objectives. First, a large number of the ruralhouseholds still lack access to financial services. Second, most of the existing MFI arenot yet financially sustainable. Finally, while funds from governments and donors arerapidly increasing, financial institutions still need solid foundations to avoid managementfailures. These issues raise questions of the role of the state to promote MFI including (1)which state-owned institutions may be necessary? (2) which level and type ofsubsidization of the financial institutions can be accepted? (3) what can be the choice forthe state between alternative investments in financial institutions or complementaryservices? (4) what are the necessary conditions for creating a favorable environment?This paper presents the evolution of views on the role of the state in the financialsystem including theoretical and empirical points of view from the interventionist periodof the 1960s and 1970s to the current period of liberalization. Based on country casestudies illustrating the divergent role of the state in the development of the rural financialsystem, the paper reviews the respective role of the state, the NGO and the privatecommercial banks in increasing their outreach and in adopting microfinance innovations.It also analyzes different issues regarding regulation of MFI. The paper concludes with a discussion of the necessary roles of the state topromote MFI. The role of the state encompasses insuring a minimum banking structure inthe rural areas, subsidizing microfinance start-up capital and innovations, and investing incomplementary services such as infrastructure, health, and education. The state must alsodevelop a clear and flexible regulatory framework for MFI with the means to enforce therules for the supervisory bodies. The paper also concludes that efficient governance ismore of a determinant than the distinction of ownership by the private or the public sectorfor the performances of the MFI.