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4.3 Supporting Networks

National and international microfinance networks are important public goods that facilitate information exchange and the transfer of innovations. Subsidizing tasks, such as designing and testing innovations, may produce larger payoffs when channeled through networks that disseminate innovations to their members. Networks, such as AccessHolding, ACCION, FINCA, Opportunity International, and ProCredit, operate in a hands-on and business-like manner in transferring and evaluating new methods and technologies to their affiliates. Support to CGAP and the MIX Market generates significant benefits because they compile information and make it readily available to the industry. By comparison, the networks for agricultural credit and rural finance to date have been less well developed and would benefit from similar investments and leadership.

4.4 Risk Mitigation

Although the examples discussed above demonstrate MFIs can successfully serve rural areas and agriculture, there are considerable risks involved. The primary way risks are managed by MFIs is by serving a diversified clientele and limiting the agricultural loans in their portfolios. Additional risk mitigating measures are needed. Microinsurance is expanding quickly, and the appropriate roles for the private and public sectors are being explored. Weather index-based crop and livestock insurance is promising but requires support to test and analyze alternative designs. Major investments are also required to develop networks of weather stations and analyze the data collected. Subsidization may be justified when the lack of private sector initiatives is caused by first-mover problems in which private investors hesitate to invest because of the ease with which competitors can copy their products (Hazell et al., 2010).

4.5 Measure and Evaluate

A vast amount of experimentation is underway to test products, models, and delivery systems for rural and agricultural finance. As described above, Opportunity International in Malawi is but one example of how an institution contributes to expanding financial access by combining the testing of innovations with in-depth evaluation and information dissemination. Donors and DFIs nurture this process when they encourage and finance other institutions to emulate this approach.

Although MFIs conduct a great deal of monitoring and reporting, there is surprisingly little robust evaluation of financial services. Recent studies using random control trials have stimulated soul searching by suggesting that previous evaluations over-stated the contribution of microfinance to poverty reduction (Rosenberg, 2010). This methodological debate diverts attention from the fact that fundamental questions and assumptions about finance have not been adequately studied. For example, is the real value of microcredit the fact that it commits the borrower to a savings plan and helps avoid temptation spending? What nonfinancial services are critical for credit to produce the desired impacts? Why is the demand for loans often overestimated? Why is farmer uptake of insurance limited without huge subsidies? How well do formal financial services serve the poor compared to traditional informal mechanisms? These questions demand careful and often costly analysis. A larger fraction of the funds currently spent to improve access to financial services should be allocated to rigorous research of fundamental assumptions.

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