Making Commercial Microfinance Work for the Poor: The Case of MFIs-Bank Linkage

Financial deepening in rural credit markets remains a long-standing issue in development finance, and the problem of credit rationing has been one of the serious obstacles for economic development. This paper studies the interaction between a borrower, a microfinance institution and a formal bank, and suggests that a linkage between microfinance institutions and formal banks can provide a market-based solution to credit rationing and hence reduce poverty in rural economies. By using the information contained in the MFI's lending decisions, a bank can make more efficient loan decisions. Such linkage has the potential to break the wall between microfinance and formal finance in low-income countries.