The Law and Economics of Microfinance

Abstract

Microfinance may be the poster-boy of international development, but the facts remain that 100 million borrowers are in poverty and most Microfinance Institutions (MFIs) are not financially self-sustainable.1 This means that there are systemic faults, which do not allow the goals of microfinance to be consistently achieved. This paper considers the interaction between regulation and the goals of microfinance being achieved, with specific focus on financially self-sustainable MFIs. Previous research has not considered microfinance from a law and economics perspective. Regulation has the potential to directly affect the financial sustainability of MFIs,2 through restricting or supporting their business operations regarding obtaining capital and product design.3 Given that financially self-sustainable MFIs have the potential to increase long-term access to financial services without reliance on donations,4 the influence of regulation in this sector is a critical area for study. Despite the importance of the topic, little research has discussed the way regulation creates incentives for MFIs and borrowers, affecting financial self-sustainability.5 Thus, a law and economics perspective, which considers just this, is an important perspective from which to consider how microfinance can achieve its long-term goals. This article is the first which considers such an important yet overlooked issue. In order to consider the law and economics of microfinance this article will present a comparison between financial relationship in developed and developing contexts and explore how microfinance completes a credit market failure that has resulted in those who are willing and able to obtain financial services being excluded from the market.