The trade-off debate in microfinance: a review of the theoretical and empirical literature

Abstract

The microfinance industry in recent years has witnessed a paradigm shift from subsidized credit to sustainable for-profit microfinance. The increasingly commercial approach raises concern over whether sustainability comes at the expense of outreach to the poorest. The ability of microlenders to simultaneously achieve the dual missions of profit and welfare is highly debated. Empirical research has examined the relationship between sustainability and outreach, but is there any conclusive evidence of the existence of trade-off? This paper critically examines the outreach-sustainability literature in microfinance. More specifically, it a) summarizes the major crises that affected the microfinance industry; b) explores the theoretical debate between subsidized and commercialized approaches of providing microfinance; c) identifies different measures used by researchers to quantify outreach and sustainability; and d) reviews the empirical findings of the outreach-sustainability relationship. The article concludes with the proposal of a more measured and rigorous empirical investigation, given the mixed outcome to date.