Microfinance Industries in Emerging Economies: A Comparative Investigation into Effectiveness as a Tool for Poverty Alleviation

Abstract

The inspiring growth of the microfinance industry, not least in Asia, has been seen to emerge as a major force supporting poverty alleviation. This paper analyzes the microfinance industry in two developing Asian countries, from the viewpoint that problems creating the gap between supply and demand in providing the necessary sources of finance impeded the establishment of an effective microfinance framework in the two countries, and attempts to uncover and explain the underlying reasons. The comparative analysis is based on several elements which are economic and poverty indicators as well as market size, existence of non-bank financial institutions providing microfinance services and products, supervision of microfinance institutions by a financial regulators, experience with transformation of microfinance institutions into regulated non-bank financial institutions (NBFIs), maturity of a supervisor in performing its role and innovation and diversification in products. The paper concluded that the microfinance industry in both countries, facing similar problems, could be made more effective by creating specialized microfinance channels, inducing greater governmental commitment, and making necessary changes to the regulatory and supervisory framework.