Types of microfinance organisation: A taxonomy

What the paper says

This paper constructs a taxonomy of microfinance organisations, based on funding, lending and regulation characteristics. The credit market for low income people is characterised by asymmetric and costly information, where default risks are relatively high. Conventional joint stock banks typically serve only borrowers who are able to signal their creditworthiness by providing collateral and accounting information. Microfinance organisations are consequently the main lenders to poor borrowers. These organisations have developed certain forms in order to deal with the problems of information asymmetry and moral hazard. They usually also need external sources of funds, in view of lower repayment rates and lower interest rates. The taxonomy of microfinance organisations thus provides a framework for examining different types and their various ways of raising funds, and for providing small collateral-free loans to poor people, in terms of their strategies in the face of information and monitoring problems.