Financial sector policy and the poor: Selected findings and issues

Author: Honohan, Patrick
Publication: World Bank Publications no. 43 (2004).

Abstract: This paper presents new empirical evidence on how financial sector policy can help the poor. It is often thought that promotion of specialized microfinance institutions is the best or only way forward. However, a strong mainstream financial system is also pro-poor—perhaps even more so: while mainstream financial depth is measurably associated with lower poverty, for microfinance this is not yet so. The roles played by microfinance and mainstream finance in tackling poverty should be regarded as complementary and overlapping rather than as competing alternatives. The essential similarities between the two will become more evident as individual microfinance firms, or associations of firms, grow to the scale needed for sustainability. Policy design that recognizes the need for larger and stronger microfinance institutions poses no threat to the health of mainstream finance. Such a policy would not impose low interest rate ceilings; nevertheless, the goal of protecting the vulnerable from credit market abuses and prejudice should not be neglected in an effective package of policies favorable to the growth of both micro and mainstream finance.

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