Responsible Finance Forum

The Next Stage of Financial Inclusion

Dean Karlan
15 October 2014
Source:  Innovations for Poverty Action
 Stanford Social Innovation Review

This paper investigates the evolving role of nonprofit organizations in providing microcredit to people with low incomes. Dr. Karlan argues that the role of nonprofit organizations has changed from providing microcredit to people with low incomes in general as for-profit companies have entered the market and begun to provide these services effectively. Instead, nonprofit institutions are addressing market failures to reach those who continue to be excluded from the market. The article is structured around three issues: (1) reaching individuals not covered by the for-profit sector, including those “too rural,” “too poor” or “too young;” (2) building trust among customers and microcredit providers; and (3) promoting innovation.

The author argues that pursuing poor people living in very rural areas is expensive and in fact unsustainable on a for-profit basis. He suggests that nonprofit organizations should promote savings-led microfinance, such as savings groups in which 10 to 30 people work together to save and loan to each other. Randomized trials conducted in Ghana, Malawi, Mali and Uganda by Innovations for Poverty Action (IPA), with the help of Plan International, Oxfam and Freedom from Hunger (FFH) indicate that savings groups initiatives have a modest, but positive impact on total savings, livestock levels and higher levels of food security.