Sustainable Microfinance: The Balance Between Financial Sustainability And Social Responsibility

Sustainable microfinance: The balance between financial sustainability and social responsibility

A business model integrating remittances and cross-border entrepreneurship to microfinance

Quang Vinh Evans Luong, Jönköping International Business School Jönköping Univerisity Gjuterigatan 5, 55111 Jönköping

Telephone: +46 36 10 10 00 Fax: +46 36 30 21 41 Email: quang.luong@ihh.hj.seSupervisor: Professor Dr. Friederike Welter Email: friederike.welter@ihh.hj.se

19th EDAMBA Summer Academy Soreze, France July, 2010

Abstract
Microfinance has been recognized as an effective tool to alleviate poverty. How to create a sustainability model of microfinance to fulfill both social responsibility and financial sustainability by integrating remittance flows and cross-border microenterprise activities to microfinance business is the aim of this study. A mixture of methodology including primary data collection, secondary data collection and case study will be employed when conducting research of microfinance institutions (MFIs) in Sub-Saharan Africa. Keywords: poverty alleviation, microfinance, financial sustainability, social responsibility, remittances, cross-borderentrepreneurship.

1. Research background
1.1 Impact of microfinance on poverty reduction
Global poverty has been one of the most burning and unresolved issues in the human history. According to World Bank statistics, there is almost 3 billion of world population living under $2.5 per day and among them, around 1 billion living under $1 per day. Government and international organizations have beencooperating to fight poverty in different parts of the world. In recent years, microfinance has been recognized as an effective tool to alleviate poverty (Rubana, 2008; Daley-Harris, 2002; Lalitha, 2008). Microfinance offers the poor a chance to get access to financial service such as credit and savings. They can apply for small loans and use them to run small businesses such as selling chickens,eggs or other basic agricultural commodity. They also have opportunities to save money in saving accounts. Microfinance programs in Bangladesh, Bolivia and Central America all show positive impacts on the poor as they help the poor, first, to smoothen their daily expenditure then to enhance welfare and stabilize income. (Rubana, 2008; Khander, 2003; Khander & Pitt, 2002; DaleyHarris, 2002; Hiatt &Woodworth, 2006). Microfinance aims to bring financial service to poor people as to provide small-scaled financial services primarily savings, credit and insurance to people performing small or micro business activities such as farming, fishing, herding or micro enterprises producing, recycling, repairing or selling goods (Lalitha, 2008). Microfinance programs are financially supported bygovernments and international organizations which means that microfinance programs depend on financial grants from donors and governments to great extent. When those financial resources are over, microfinance institutions would find it difficult to maintain the operation of microfinance programs, thus, the impacts on poverty alleviation would be diminished. As a result of this, microfinance programs faceresource constraints and are not self-sufficient (Zeller & Meyer, 2002). This hinders microfinance institutions’ ability to expand their service to the very poor or extremely poor communities.

1.2 Financial sustainability and social responsibility
In order to realize the aim of reaching poor people, microfinance institutions should find ways how to survive and not to depend so much on donors andgovernments, i.e. to be self-

sufficient. The institutions should be able to cover cost and make profits on services that they offer to customers (Copestake et al., 2002). Many MFIs in Latin America, to name a few, Prodeem, Banco Solidario, have become financially sustainable by cooperating with banks and business organizations as to cross-sell additional products such as savings, pensions...