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DUP 2006-01: Where Does the Money Go?

Henk Van Oosterhout set out to study the dynamics of what he calls "the finance frontier" in developing countries. In particular he wanted to analyze both the demand and the supply side of microfinance and see to what extent these are aligned. He assumes that there are three main actors involved in microfinance, namely: * the governments and donors as the main movers and shapers of microfinance policies; * the financial intermediaries, both formal and informal, some supported by donors and governments, others operating completely independently from them; and * the individual clients and micro entrepreneurs who are the recipients of financial services. Van Oosterhout aimed to analyze the role of these different actors and their motives; to see why they are involved in microfinance (or sometimes the opposite, such as commercial banks who stay away from building-up a microfinance portfolio). The author believes the microfinance literature emphasizes the institutional and supply side of financial services. Mainstream microfinance studies deal with approaches, techniques, repayment levels and institutional and financial sustainability. Not much attention is given to the demand side of microfinance, which is universally assumed to be present and is often based on neo-classical economic theories of rational human beings (homo economicus). The demand is also assumed to be proven by the countless studies that link the supply of small loans to poverty alleviation. Research techniques and approaches are generally applied universally with very little attention paid to local and contextual variations and very little is known about the interactions between and among policy makers, financial intermediaries and the clients at grassroots level. Van Oosterhout conducted a literature review, utilised his 20 years of field experience, and carried out a survey in the Philippines to test and substantiate his hypotheses. His book is structured as follows: 1. An opening chapter which explores the issue of finance, the basic functions of financial intermediation, and the role of (micro) finance in the economy. In particular he looks at the question of transaction costs. 2. A chapter focusing on the role of governments and donors in microfinance – why they are involved and what their experiences have been over the last 40 years. 3. The third chapter reviews the formal and informal financial markets in developing countries. He examines the motivation of suppliers, their organisational structures, and their efficiency in terms of the development process and reaching the poor. 4. The fourth chapter looks at the client side of the finance frontier. He reviews financial behaviour at both household and individual level and the effect of the local economic and socio-cultural environment on this behaviour. The remainder of the book examines all these factors in the context of the Philippines and reports the results of Van Oosterhout's field work in Baguio City and Benguet province. In the final chapter he notes: "The study tried to challenge several basic axioms of governments and donors, especially concerning the assumed role of microcredit as a tool for poverty alleviation. Among these challenges (is the assumption) that most poor people are small entrepreneurs or self-employed, and depend on this single source of income alone. This is obviously not the case. ... Most of these entrepreneurial activities of the poor are sideline income sources only ... given the opportunity, many would prefer to be employed by a successful local entrepreneur." He suggests that microfinance interventions need to recognize the different categories or types of poor people, each with their different profiles and financial needs. Thus programs that are trying to channel loans to the very poor are missing the point and targeting needs to be managed quite differently. What is "small credit" for the donor, government or financial intermediary is "large debt" to very poor people.

PinoyME Foundation
Authors Keywords
Oosterhaut, Henk Van; microfinance; financial services;
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Published in 2006 and available in the Rozenberg Publishers or Downloaded 345 times since November 25, 2011
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