Relaxing Financing Constraint In The Microfinance Industry: Is Commercialization The Answer?

Abstract

A critical question facing Microfinance Institutions (MFIs) is whether they can attract commercial capital as a solution to their financing problem and as a way of relaxing strained development aid. While donations have made enormous contributions to microfinance development and poverty reduction among the poor to date, an attempt to scale-up funding from this traditional source has been an uphill task. It is argued that vast resources of commercial capital can become available to microfinance if critical success strategies of access to commercial funding are developed. This paper offers research evidence that identifies significant predictors for successful Commercialization of microfinance based on firm-level data from African MFIs for three financial years between 1998 and 2003. The research develops and tests a commercial rating rule (predictive model) for determining success in tapping commercial capital. The results indicate the emergence of new finance sources, widened financing options for MFIs and the capacity to relax growth constraints in the industry. However, the findings also suggest the need for MFIs to satisfy the interests and requirements of prospective commercial investors to overcome new challenges.