Second Tier Microfinance Institutions in Asia

Abstract

This article, which appeared in Small Enterprise Development (Vol 9 No 2, June 1998), outlines the role of ‘second tier’ microfinance institutions in Asia. In recent years, a number of countries in Asia have established ‘second tier’ or ‘wholesale’ microfinance institutions to channel funds from the government and/or donor agencies to individual ‘retail’ microfinance institutions (MFIs) at concessional interest rates. The largest and most successful of these is the Palli Karma Sahayak Foundation (PKSF) in Bangladesh, but second tier institutions are also major players in India, Sri Lanka, the Philippines and Thailand. This article reviews the experience of second tier microfinance institutions in a number of countries in Asia. It finds that such institutions can be a very effective means for governments and donor agencies to channel support to MFIs. It is more efficient for one institution to monitor and evaluate MFIs than for different government and donor agencies to conduct their own analyses. Perhaps most importantly, second tier institutions can also contribute significantly to a more efficient microfinance sector by setting and enforcing appropriate performance and reporting standards.