Marketing approach to microfinance for poverty reduction in sudan

Abstract

ABSTRACT The process of making financial services available to the poorest segments of the society is considered as an important part of poverty alleviation strategies. As a result, microfinance institutions have been seen as one of the tools intended to reduce the poverty of low-income people. Poverty reduction, however, can only be attained if microfinance institutions achieve a good outreach and financial sustainability. However, opinions over the relationship between outreach to the poor and financial sustainability is divided. The question of whether financial sustainability obtained as a consequence of outreach or financial sustainability leads outreach to the poor being an issue of concern to many economists and policy makers in formal financial institutions. As various studies on the MFIs’ performance in different countries confirm the possibility of achieving financial sustainability while serving the poor, other studies have found the evidence to be not so favorable and supportive to the above argument. The main objective of this research is to examine empirically the relationship between outreach to the poor and financial sustainability of microfinance institutions (MFIs) in Sudan. Therefore, the research hypothesizes that, financial sustainability leads outreach, there is no trade-off between financial sustainability and outreach goal of microfinance institutions, and microfinance in Sudan is pro poor. The research uses a sample of 30 observations, starting from 2007:1 to 2009:6, and two proxies for outreach and financial sustainability. Namely, the study uses number of clients (NCs) and profit margin (PM) as proxies for outreach to the poor and financial sustainability respectively. A case study approach is used in which an econometric model is employed and the Granger causality test, Ordinary Least Squares (OLS), Co integration test and error correction models are applied. The results of Granger causality test suggests one way causation channels from financial sustainability to outreach in the short run. That is, financial sustainability appeared to facilitate the reaching of poorer clients. However, the error correction model results seem to be promising. Although they do not lend support to the short run relationship appeared in Granger causality test, they seem to be consistent and supportive to the long run relationship. A strong evidence of causality between financial sustainability and outreach appeared in the long run. This means both outreach and financial sustainability is a cause and effect of each others in the long run. On the other hand, the research investigated the social dimension of microfinance (pro poor microfinance). The results reveal significant gender differences on the outreach of the case study bank. While only (27%) of women have access to credit, men have the bulk of finance (73%). This confirms the fact that banks are unable to reach the poorest segments that are present at the grass-roots community level and microfinance in Sudan is not pro poor. The research emphasizes the importance of financial sustainability for expanding the outreach. Only viable financial institutions involved in microfinance can ensure permanency of services to an increasing number of the poor and contribute significantly to poverty reduction. However, improving financial sustainability in general is not sufficient to ensure that financial services are made available to the poorest of the poor. The social dimension of microfinance (depth of outreach) can be achieved through increasing the number of women access to credit, group lending and rural biased credit. Therefore, the banking System should develop more pro-poor products and services, delivery mechanisms and innovative social collaterals because these are essential to attract the poor into the formal sector.