Research & Analysis

State-Owned Development Banks in Microfinance

Microfinance has gained growing recognition as an effective tool in improving the quality of life and living standards of very poor people. This recognition has piqued the enthusiasm of government officials in various countries to reform existing state-owned development finance institutions (Brazil, India, Tanzania) or to create new ones (Vietnam) to carry out microfinance operations. The fact that one of the world’s leading microfinance institutions (MFIs), Bank Rakyat Indonesia (BRI), is a state-owned bank, often fuels this enthusiasm. It is important to note, however, that BRI’s success as a microfinance intermediary is an anomaly. The vast majority of successful MFIs are private, nongovernment entities that run on sound business principles.

The well-intentioned objective of state-owned development finance institutions—reaching the neediest people—is too often subjected to political influences. Politicized mandates place undue emphasis on credit outflows over recovery. Poor lending practices such as, weak borrower selection criteria, little or no monitoring, and subsidized interest rates weaken the state-owned institutions financially and make them continually dependent on government or external donor funds. In short, the intent is not to establish a sustainable financial institution that will continue to provide a stream of services to the poor over the long term, but to create credit disbursement channels.