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Governments play a complex role in
microfinance. Until recently, many governments believed that it was their responsibility to provide development finance, including direct lending to the disadvantaged. But decades of experience have shown that when governments engage in retail lending to the poor, they almost always do it badly. Short-term political gain is very tempting for politically controlled lending organizations: they disburse too
quickly, and they collect too sporadically because they are unwilling to be tough on defaulters. Furthermore, good
microfinance requires an agile and efficient corporate culture, which can be difficult to maintain in an organization subject to government hiring and firing policies.
More recently, many governments have recognized that they can not do a good job of lending to the poor, yet they still seek to promote such lending by setting up apex facilities that make wholesale funding available to a range of private microfinance providers. Such apexes can be useful if the country has a critical mass of solid microfinance institutions. However, they usually have not been effective in developing good institutions where few or none existed before, and they are likely to be subjected to political pressure unless their structure effectively precludes government influence.
Although governments are not usually good at lending, they play an important role in setting appropriate policies. The key things that a government can do for microfinance are to maintain macroeconomic stability and to avoid interest-rate caps that prevent MFIs from covering their costs and operating sustainably. Beyond this, it is doubtful that the development of microfinance, at least in its earlier stages, requires a national policy framework. No such framework was present in most countries where microfinance first reached massive numbers of clients˜for instance, in Bangladesh, Indonesia, and Bolivia. In fact, political attention to microfinance has sometimes done more harm than good.
When microfinance providers take up voluntary deposit services, then governments need to regulate it in order to protect depositors. For more information on governments and protecting depositors, see the FAQ regarding the role of financial regulation and supervision.
Claudio Gonzales and Douglas Graham, State-Owned Agricultural Development Banks: Lessons and Opportunities for Microfinance (Columbus, Ohio: Rural Finance Program, June 1995).
Fred Levy, CGAP Occasional Paper No. 5: Apex
Institutions in Microfinance (Washington, D.C.: CGAP, January 2002).
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