This Policy Comment explores the ability of microfinance to assist the very poor in the developing world by examining the lessons from the implementation of microfinance programs in the Philippines. These lessons are:
* Microfinance has become a 'viable option' only because of a poorly
functioning institutional environment;
* Microfinance is working reasonably well as a band-aid solution to poverty, i.e. it puts food on the table;
* Microfinance is not providing a bridge to sustainable development because it fails to address the root causes of poverty. As such, microfinance borrowers fall short of graduating (i.e. entering the formal
economy), which should be the ultimate goal of microfinance.
In order for microfinance to become a bridge to a sustainable solution, institutional reforms are necessary. In the case of the Philippines, from
which important lessons can be drawn for other developing countries, these reforms are:
* The removal of discriminatory laws, which disenfranchise generations of people;
* The absolute need to recognize, codify and enforce property rights;
* Reduction in the scope of government activity in order to reduce corruption, and;
* Increased liberalization of the financial sector.
