Microfinance has been getting its fair share of attention lately. While Yunus received a Presidential Medal of Freedom, a number of studies have cast doubt on the benefits of microlending. David Roodman, a research fellow at the Center for Global Development, points out the microfinance debate has definitely been heating up. But I suspect some of this debate is obscuring the bigger picture. Even if microfinance can help support small businesses and reduce poverty, as proponents hope, it certainly isn't a magic bullet.
In addition to microfinance, something a bit more systematic is needed—the development of the kind of financial infrastructure that supports the widest possible access to a range of formal financial services. In practical terms, this means developing a core set of financial institutions: credit bureaus, payment systems, remittances and collateral registries, and an appropriate set of laws and regulations.
A new report from the World Bank Group provides a framework for this kind of systematic approach. Financial Infrastructure: Building Access Through Transparent and Stable Financial Systems lays out a definition of financial infrastructure, develops an index to benchmark countries, and explains how policymakers can take practical steps to improve financial infrastructure in their countries.
What are the payoffs for reform in this area? Potentially huge, according to the report. Figure 3 from the report gives an idea of the number of people who could benefit:
Here is the website with details about the report. Here is the full PDF. And here is the press release.
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