Investigating a best practice model of microfinance for poverty alleviation: Conceptual note

The purpose of this paper is to establish what constitutes best practice models of microfinance for poverty alleviation. It argues that the new microfinance phenomenon characterized by two camps; commercial and developmental players should be recognized as legitimate separate microfinance approaches with different aims and motives. This paper aims to establish strong foundational argument for developing parallel thinking and separate best practice models for effective engagement with each approach.

Rapid evidence assessment methodology was used to systematically identify and analyze a comprehensive list of relevant literature on best practice models of microfinance for poverty alleviation from both online and offline publications. Over 40 publications on microfinance best practice were critically reviewed with a specific attention to how the two approaches to microfinance (commercial and developmental) were dealt with in relation to impact on poverty and best practice approaches.

The paper argues that, business priorities of commercial microfinance providers differ significantly to those of development microfinance providers and this impacts on the program design which means clients of each regardless of coming from the same target group may have different experiences. The microfinance concept evolved far beyond any single philosophical or ideological confinement that there is now need for formal recognition and acknowledgment that commercial and developmental microfinance paradigms are parallel models of approaches whose continuous evolution is less likely to converge in the near future, so should be treated separately.

Because the purpose, challenges and requirements of commercial and developmental microfinance approaches are different, continued lack of purposeful distinction between the two will continue to cause confusion and lack of precision in policy response on specific sector challenges. Further work and discourse on the impact of both commercial and developmental approach to microfinance on service delivery to the poor is required to test the implications on best practice.

The paper highlights the fundamental flaw in the current perspective of microfinance sector which fails to recognize irreconcilable parallel approaches underpinned by different motives.