The microfinance industry is now in its third decade of growth. It is a substantial component of development efforts in most developing countries and also now in Central and Eastern Europe and the Newly Independent States (Forster et al. 2003) whereit is expanding rapidly. During this growth period there has been ever-increasing attention to the modalities through which microfinance service provision seeks to contribute to the achievement of development objectives. Two routes receive most attention. The first is the contribution to poverty reduction through ensuring service delivery to poor households that have the capacity to strengthen their livelihoods, but have lacked the financial resources to realise that potential. This does not usually mean an exclusive focus on targeting households that are poor, though it may, but it does mean active programming to ensure inclusion of the poor. The second is the contribution to the establishment of functional financial markets, particularly in rural areas for households that were previously without proper access to financial services. To simplify, we can refer to the former as the poverty route and the latter as the market route. The core issue facing the industry today is how microfinance organisations (MFOs) can combine these routes. Few within the industry would disagree that both are desirable but the poverty route, through targeting and organisational learning to improve poverty outreach, has financial costs and there is a trade-off between thetwo courses. Quantifying these costs and the associated welfare benefits is a key industry challenge.
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