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History matters in microfinance

This text shows that microfinance is not a poor solution for poor countries, that savings-driven microfinance institutions in cooperative or community ownership are equally feasible in rural and urban areas, and that if properly regulated and supervised, they have great potential in poverty alleviation and development, both in rural and urban areas.

Hans Dieter, June 2003

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Summary :

What distinguishes a developed country like Germany from many developing countries is not the prevalence of self-help and informal finance at an earlier time. Community- and member-based as well as other informal financial institutions are exceedingly widespread throughout the world. In Nigeria for example, they date back to the 15th and 16th century from where they were carried by slaves as part of their social capital to the Carribbean, where both the institution and the original Yoruba term, susu, are still found today. The major difference seems to be the legal recognition given to informal finance in Germany and the protection of the institutions through prudential regulation and effective supervision. While there are some examples of limited magnitude of upgrading informal finance in developing countries, there is no case where a modern financial system has been build on indigenous institutions. In the microfinance community, the importance of an appropriate legal framework, regulation and supervision is controversial. Has the time come to revive an older controversy?