Microfinance for poverty alleviation: Do transnational initiatives overlook fundamental questions of competition and intermediation?

Abstract

Numerous microfinance initiatives around the world aim to alleviate poverty in developing countries. However, debate persists about their effectiveness and sustainability – a concern for transnational corporations and the international business community, which contribute about $9.4 billion to microfinance funding. In this policy-oriented article we aggregate findings from two studies in Indonesia that help explain why moneylending can still thrive when low-interest microfinance is widely available and why the poorest borrowers benefit less than the less-poor. To avoid methodological debates about validity, we interview market participants and triangulate the perspectives of borrowers with those of formal and informal lenders. Importantly, our research includes current and past borrowing from formal and informal sources, prompting participants to draw comparisons. We find that the importance to borrowers of key characteristics of informal lending is insufficiently recognized and that inappropriate human resource management and informal intermediation are significant problems. The latter can be an unintended consequence of formal microfinance: The availability of formal low-interest microfinance creates informal intermediation opportunities for entrepreneurs, often developing from casual intermediation into systematic deception. We discuss implications for microfinance policy with reference to the United Nations Sustainable Development Goals and offer suggestions for further research.

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VOLUME 24 NUMBER 3
TRANSNATIONAL
CORPORATIONS

Micronance for poverty alleviation: Do transnational initiatives
overlook fundamental questions of competition and intermediation? 103
Micronance for poverty alleviation: Do transnational
initiatives overlook fundamental questions of
competition and intermediation?
Frithjof Arp, Alvin Ardisa and Alviani Ardisa*1
Numerous micronance initiatives around the world aim to alleviate poverty in
developing countries. However, debate persists about their effectiveness and
sustainability – a concern for transnational corporations and the international
business community, which contribute about $9.4 billion to micronance funding.
In this policy-oriented article we aggregate ndings from two studies in Indonesia
that help explain why moneylending can still thrive when low-interest micronance
is widely available and why the poorest borrowers benet less than the less-poor.
To avoid methodological debates about validity, we interview market participants
and triangulate the perspectives of borrowers with those of formal and informal
lenders. Importantly, our research includes current and past borrowing from formal
and informal sources, prompting participants to draw comparisons. We nd that the
importance to borrowers of key characteristics of informal lending is insufciently
recognized and that inappropriate human resource management and informal
intermediation are signicant problems. The latter can be an unintended consequence
of formal micronance: The availability of formal low-interest micronance creates
informal intermediation opportunities for entrepreneurs, often developing from casual
intermediation into systematic deception. We discuss implications for micronance
policy with reference to the United Nations Sustainable Development Goals and offer
suggestions for further research.
Key words: micronance, competition, formal, informal, intermediation, Indonesia,
qualitative
* The authors are at the Department of International Business & Management, the University of
Nottingham, Ningbo, China. The corresponding author is Frithjof Arp. Contact: frithjof.arp@nottingham.
edu.cn The authors are grateful for comments from participants of the rst international ‘Workshop on
Human Security in the Global South’, 24–25 February 2016 at the University of Nottingham, Ningbo,
China, and of the 2016 meeting of the Academy of International Business, 27–30 June 2016, New
Orleans, United States.

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1. Introduction
Debate persists about the effectiveness and sustainability of international micronance
initiatives to alleviate poverty (Chliova, Brinckmann and Rosenbusch, 2015; Khavul,
Chavez and Bruton, 2013). Data and statistical methods are questioned (see e.g.
the 15-years-and-ongoing dispute in Pitt, 2014; Pitt and Khandker, 1998; Roodman
and Morduch, 2014), and some studies even suggest a lack of any signicant effect
(Nghiem, Coelli and Rao, 2012). Other studies nd that micronance is effective but
that the poorest borrowers benet less than less-poor borrowers (Islam, Nguyen
and Smyth, 2015), particularly when longer time periods are taken into account
(Banerjee, Breza, Duo and Kinnan, 2015). Hence, our understanding of the effects
of micronance remains incomplete.
Why, for example, can moneylenders still thrive in countries where low-interest
micronance is widely available? Many studies of international micronance appear
to occur in a vacuum, assess the effectiveness of specic initiatives in isolation and
ignore competition from informal sources of lending or other phenomena not easily
quantied (Arp and Ardisa, 2016a). There are “important gaps in data availability,
especially in developing countries, as well as for informal and rural sectors” (United
Nations Inter-agency Task Force on Financing for Development, 2016: 20). But
if formal micronance were effective, one would expect an obvious impact on its
informal competitors. Competition theory suggests that products or services with
inherent advantages for customers will expand their share of competitive markets
and potentially even achieve monopoly status (Sharkey, 1982). Formal, low-interest
micronance offers inherent advantages to poor borrowers, who often start their
microventures through credit from informal lenders (Banerjee et al., 2015; Tsai,
2004; Turvey and Kong, 2010). Hence, low-interest, formal micronance could be
expected to achieve monopoly status. At the very least, the effectiveness of formal
microcredit should be noticeable – if not precisely enumerable – from its impact on
informal competitors.
Monopolistic competition theory (Chamberlin, 1947) describes imperfect markets
in which competitors coexist without impact on each other. This is undesirable,
as inefcient markets create social costs that burden the international community:
Lenders can charge prices exceeding marginal costs, operate with excess capacity
and spend too much on publicity rather than reduce the price of their product (see
e.g. Krugman, Obstfeld and Melitz, 2015). This risk of social burden leads us to a
discussion of micronance policy and suggestions for future research with reference
to the rst and foremost United Nations (UN) Sustainable Development Goal (SDG)
of ending poverty “in all its forms everywhere” (United Nations, 2017) as well as more
specic considerations (United Nations IATF on Financing for Development, 2016).
In the next section, a review of the literature and a summary of our research project
to date provide the basis for that discussion.

Micronance for poverty alleviation: Do transnational initiatives
overlook fundamental questions of competition and intermediation? 105
2. Literature review
Micronance initiatives for low-income households are deemed by many to have a
positive effect on the lives of people in poor countries (Baye, 2013; Ghalib, Malki and
Imai, 2015; Imai, Arun and Annim, 2010; Imai et al., 2012; Imai and Azam, 2012). Not
only taxpayer-funded donations support these initiatives; in addition, transnational
corporations (TNCs) and the international business community are deeply involved.
The food giant Mars, for example, supports micronance initiatives in 15 cocoa-
growing communities in countries such as Côte d’Ivoire and Indonesia. Seeking to
empower female entrepreneurs, it provides loans and microgrants to fund inputs
within its supply chain (Mars, 2015). The banking giant Citibank invests in micronance
initiatives through a range of programmes. It maintains a partnership with the U.S.
Government’s Overseas Private Investment Corporation, which funds micronance
initiatives in developing markets around the world and has provided more than
US$417.4 million in nancing to 46 micronance institutions in 24 countries. It also
partners with the Philippines-based Asian Development Bank (ADB) to facilitate local
currency loans of up to US$100 million to micronance institutions in the Asia Pacic
region (Citibank, 2016: 80). TNCs Pearson, Hewlett-Packard, Google and MetLife
are among the funding partners of the transnational initiative Kiva, which provides
US$979.9 million in micronancing for poverty alleviation in 83 countries (Kiva.org,
2016). Indeed, the World Bank’s 2016 Cross-Border Funder Survey estimates that
US$9.4 billion (28%) of the US$34 billion of funding for nancial inclusion comes from
private sources, with more than two thirds of overall funding used to nance lending
portfolios (Soursourian, Dashi and Dokle, 2016). Hence, TNCs and the international
business community are important stakeholders in the debate about micronance
effectiveness.
There appears to be a growing consensus that poverty alleviation requires asset
accumulation through entrepreneurial activities (Swain, Nguyen and Vo, 2008). Loans
to micro-entrepreneurs help people accumulate assets, whereas non-productive
loans merely help people consume more (Banerjee et al., 2015; Bruton, Ketchen
and Ireland, 2013; Usman et al., 2015). Therefore, research typically focuses on
micro-entrepreneurs (Bruton, Khavul and Chavez, 2011), and we follow this agenda.
For micro-entrepreneurs in poor regions, informal as well as formal micronance
plays an important role (Banerjee et al., 2015). In China, for example, more than
67% of farm households borrow from friends and relatives (Turvey and Kong,
2010), as these informal lenders are accessible “at no cost” (Gine, 2011) other
than maintaining a social network (Banerjee et al., 2015). Other sources of informal
credit are moneylenders, trade credit, and rotating savings and credit associations
(ROSCAs; see e.g. Tsai, 2004). For example, ROSCAs are seen as increasing
venture opportunities, especially for women, even in less-poor regions such as urban
Malaysia (Ghazali, 2003).

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In addition, loan ofcers in formal micronance organizations play an important role.
In Zambia, for example, they are found to act more like “debt collectors” although
they were originally recruited to empower the poor (Siwale and Ritchie, 2012). In
Nigeria, complex application processes and loan ofcers demanding collateral lead
to informal over formal borrowing, and the majority of micro-entrepreneurs in a study
of Western Kenya choose informal lenders for the same reasons (Alila, 1998). Many
micro-entrepreneurs start their ventures using informal microcredit without collateral
and with little or no documentation. Informal lenders provide access to convenient
and quickly disbursed loans, are available at any time of day and night, blend with
the community, know borrowers at a personal level and cater to specic needs of
rural residents (Jones, 2008).
Unfortunately, informal lending also involves loan sharks charging high interest rates
and collecting debt through coercive methods. Many studies identify the limited
supply of formal credit as the reason for their persistence (e.g. Tsai, 2004). However,
the continued existence of informal lending cannot anymore be explained everywhere
by a gap between supply and demand. Formal microcredit has become widely
available in many countries, and multiple operational problems have been addressed
(the cost of processing many small loans, lack of borrower credit histories, lack of
collateral and income seasonality of many ventures). Both monitoring and transaction
costs, for example, can be reduced by gleaning information from social networks of
local communities (Khavul et al., 2013). Therefore, the question remains why informal
lending still thrives when formal micronance is widely available. We explore that
question with the following methods.
3. Methods
Roodman and Morduch (2014: 599) warn that exclusive reliance on one type of
micronance study “is not optimal” because validity can be problematic and results
can disappear after dropping statistical outliers and assumptions critical for the
analysis. They argue that researchers, reviewers and journal editors should “take
steps to prevent methodological complexity from obscuring fundamental issues”
(Roodman and Morduch, 2014: 601). In our research, we avoid methodological
complexity through an inductive approach (Corbin and Strauss, 2008). Assessing the
effectiveness of micronance through its effect on competitors, we interview market
participants and triangulate the perspectives of borrowers with those of formal and
informal lenders. Importantly, this includes current and past borrowing from formal
and informal sources, prompting participants to draw comparisons.
Our choice of Indonesia as the research setting is justied by that country often being
held up, along with Bangladesh, as an example of widely available micronance.

Micronance for poverty alleviation: Do transnational initiatives
overlook fundamental questions of competition and intermediation? 107
Indonesia has more than 7,000 micronance outlets offering low interest rates, loans
not requiring collateral and repayment options that account for income seasonality
(Bank Rakyat Indonesia, 2015). They are supported by the Government through
Bank Rakyat Indonesia (BRI), an arrangement which, according to UNESCO’s and
its own assessment, has proved to be successful, sustainable and protable (Bank
Rakyat Indonesia, 2015a; Robinson, 1997). The international business community
and TNCs hold signicant stakes in the effectiveness of micronance initiatives in
Indonesia: Citibank, Mars and Kiva.org, for example, are active. The insurance
giant Allianz, through a public-private partnership with the German development
organization GIZ and Indonesian micronance outlets, developed a modular credit-
insurance product (payung keluarga: family umbrella) with an average premium
of US$1.30 per year that has reached the milestone of one million active insured
people. Crucially, it is local loan ofcers that decide which modules to apply, and the
chosen package is compulsory for micronance borrowers (Prasetyo, 2013).
Aiming to answer “why” questions, we chose semi-structured interviews to gain
in-depth insight into the phenomena under investigation, establish meaning and
construct theories based on the data collected. Rigidly structured interviews
or quantitative methods such as surveys would not permit unknown themes to
surface (Creswell, 2007). We conducted interviews in suburban Yogyakarta and its
surrounding rural areas from 6 June to 5 July 2015 and from 14 June to 20 July 2016.
Our eldwork in 2015 on competition between formal and informal lending (Arp and
Ardisa, 2016a, 2016b) included the observation of informal intermediation. Therefore,
we returned in 2016 to further explore this phenomenon. We conducted interviews
with 47 participants, of whom 24 are borrowers (farmers, cottage industry and small-
store operators), 5 are representatives of formal micronance organizations and 18
are a purposive sample of informal intermediaries. Access to participants was difcult
but was gained through one interviewee in 2015 and further personal approaches
in 2016. This was combined with the snowball method of asking initial participants
(borrowers and intermediaries) for additional introductions.
The approach worked well with borrowers and informal intermediaries once
trust had been built, but not so well for representatives of formal micronance
initiatives once they understood that we wanted to discuss the topic of informal
intermediation. Eleven informal intermediaries borrow from BRI outlets and three
from Bank Pembangunan Daerah (BPD), Bank Perkreditan Rakyat (BPR), and a
formal cooperative (Koperasi). Their loans are obtained through the government-
supported, low-interest, collateral-free Kredit Usaha Rakyat (KUR) programme (loan
amounts Rp 1–25 million) or commercial programmes that offer loan amounts up
to Rp 200 million. The Government allocated Rp 10.5 trillion to subsidize the low
interest rate, expand access to cheap loans and motivate entrepreneurship (Bank
Rakyat Indonesia, 2016).

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We were concerned, perhaps excessively, about the sensitivity of the informal
intermediation topic. Our strategy therefore was to have the 2016 interviews
conducted by a youngish, innocent-and-naïvely-interested-looking researcher (we
do not mean to suggest that age or looks are cognate with naïvety). This strategy
is based on the notion that the appearance of researcher naïvety can help make
interviewees feel secure and comfortable to volunteer information (Davidson, 2003).
Specically, this strategy helped “encourage participants to elaborate spontaneously
on their own answers in eshing out the details of their story” (Davidson, 2003: 82).
To further enhance the “no risk” impression, all interview questions were asked
in standard Bahasa Indonesia typical for a naïve, young, big-city academic from
Jakarta. Some participants responded in Bahasa Indonesia and some in Javanese.
Data were analysed with the aid of a second coder and spreadsheets containing
participant numbers and texts. We rst coded the transcribed interview segments
for the key themes that had emerged early and then categorized subthemes. We
then held discussions to establish a common understanding of difcult-to-translate
interview segments, the meaning intended by participants, which rst-tier themes
the various subthemes belong to and the relative importance of themes. The
rudimentary knowledge of Indonesian of the second coder helped in that regard.
We had to, for example, consider the conceptual equivalence of “to give money”
and “to lend money” in some of the interview terminology, and discuss the most
appropriate translation of Indonesian terms such as bank besar and bank bulanan
(literally: big bank and monthly bank, indicating the interest payment frequency of
formal micronance), versus lintah darat and rentenir (leech or blood sucker and loan
shark), and pedagang, pengepul and tengkulak (trader, collector or hoarder, and
middleman).
4. Findings
We found that poor human resource management and informal intermediation
diminish the effectiveness of formal micronance. In addition, key characteristics
of some informal lending are insufciently recognized. Our 2015 study found two
distinct types of informal microcredit competing successfully with formal micronance
organizations: moneylenders and trader-nanciers (Arp and Ardisa, 2016b). We
also found in 2015 that borrowers referred to some informal lenders as tengkulak
(middlemen). This caused us to collect additional data in 2016 showing that many
moneylenders intermediate between formal micronance organizations and micro-
entrepreneurs by splitting loans obtained from formal micronance into smaller credits
to extend to borrowers. In aggregate, our ndings help explain why the poorest
borrowers benet less from formal micronance than do less-poor borrowers.

Micronance for poverty alleviation: Do transnational initiatives
overlook fundamental questions of competition and intermediation? 109
4.1. Why moneylending can still thrive
Our ndings on this aspect are congruent with other studies. All interviewees
who borrow from moneylenders view the ease of obtaining loans as the greatest
advantage of this source of funding. The need for formal micronance initiatives to
improve ease of access is emphasized by our nding that some micro-entrepreneurs
who borrowed from formal micronance in the past have returned to moneylenders.
They report being angry about having to close their store, queue at crowded
micronance ofces and provide documentation such as land or birth certicates.
Some of the poorest in Indonesia have neither birth certicates nor any other
form of ofcial documents. Moneylenders offer small, short-term loans without
documentation that are available quickly, e.g. when borrowers suddenly need to
order stock from distant cities.
More important, borrowers complain that loan ofcers at formal micronance
organizations ask for collateral despite the Government advertising collateral-free
micronance (KUR). Moneylenders take advantage of the fact that human resource
management practices at formal micronance organizations incentivize loan ofcers
to achieve low ratios of non-performing loans (NPLs) rather than to extend credit to
the right borrowers. A typical remark of a moneylender:
I know that [this formal lender] gives loans up to [Rp] 20 million without
collateral, yes I know it. Actually, if [my borrower] is offered a loan without
collateral from a bank, she will want it. But the constraints are the
procedures.
The procedures discourage poor borrowers in multiple ways. What borrowers need
are small, collateral-free loans without documentation and bureaucratic procedures,
quickly disbursed, and available as and when business opportunities arise:
I will receive the money right away. I like it fast because, for business, once
I get the loan, I can quickly start earning!
Borrowers perceive the short loan periods and small loans of moneylenders as
“nishing” loans faster in order to borrow anew. They fear not being able to make
large monthly payments to formal micronance organizations, perceived as “more
expensive” than the “cheaper” small daily payments to moneylenders. More nancially
literate borrowers see the high cost of daily payments but, owing to demands for
collateral from loan ofcers, see no alternative to moneylenders. Daily payments are
particularly problematic for cottage industry operators who can collect revenue only
after production processes are completed. Their lack of daily cash ow mirrors the
income seasonality of poor farmers in rural areas and helps explain the existence of
the second form of informal lending we found.

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4.2. Why trade nance can successfully compete with formal micronance
Trader-nanciers provide microcredit, collaborate closely with borrowers, and
connect producers and markets. Among their clients we again found entrepreneurs
who had previously borrowed from formal micronance. Comparisons drawn by
these interviewees emphasize the need for formal micronance organizations to
improve their competitive offers.
Microcredit from trader-nanciers typically takes the form of productive goods
rather than cash. For example, trader-nanciers supply seeds, tools, plastic sheets,
fertilizers or pesticides that are valued so that borrowers owe xed amounts. Loan
amounts are often signicantly larger than those from moneylenders, and borrowers
are obliged to repay by selling their outputs to trader-nanciers below the market
prices in the surrounding areas. Trader-nanciers distribute outputs to urban markets
where prices (e.g. for fresh produce) are higher than in remote areas. Hence, trader-
nanciers generate multiple-source revenue from upstream, downstream and
arbitrage opportunities between rural village and distant town markets that borrowers
are unable to reach. Another important characteristic is the implicit interest of trade
nance, causing many borrowers to not perceive it as lending:
I asked him and he bought me plastics and seeds. I did not borrow any
money.
There is no interest rate. There is no interest, unlike loans from neighbours
or banks.
In addition, trader-nanciers ensure the sale of perishable produce; are extremely
exible with payments, debt rollovers and additional loans, e.g. when crops fail; and
provide practical help with harvesting. Although some borrowers recognize that
larger loans are available through formal micronance, they prefer trader-nanciers
because of their integration in rural communities. For example, substantial trust is
involved during the harvesting, transportation and weighing processes, with farmers
and trader-nanciers trusting each other to weigh produce correctly without both
parties present. Borrowers view trader-nanciers as genuinely supportive.
4.3. Why informal intermediation can occur
Informal intermediation is common. Intermediaries typically borrow small amounts
offered through the KUR programme or other poverty alleviation initiatives, and then
lend on a fraction or the entire loan to other borrowers (“I read it as an opportunity
for additional income”). Thus, the availability of formal, low-interest micronance
creates intermediation opportunities for entrepreneurs, often developing from casual

Micronance for poverty alleviation: Do transnational initiatives
overlook fundamental questions of competition and intermediation? 111
intermediation into systematic deception for further loans (professional intermediation).
An example of casual deception is when market stall operators apply for unnecessarily
large formal loans, claiming to purchase additional inventory not actually needed.
Such casual intermediaries lend to poorer borrowers on an opportunistic basis. An
example of systematic deception are small repair shops that obtain loans to use for
the shop’s operation when, in reality, the loans are used for complex arrangements
such as providing credits to the poor for the purchase of motor scooters while renting
the same motor scooters on a time-share basis to others.
Poor human resource management at formal micronance organizations permits –
indeed, even fosters – informal intermediation and diminishes the effectiveness of
formal micronance. We found that loan ofcers at formal micronance organizations
are incentivized to focus on quantitative outcomes such as low NPL ratios, the
number of loans and rollovers of “safe” loans, rather than on the poorest borrowers.
Well aware of informal intermediation activities and deceptions, they deliberately
ignore this information and extend loans to those borrowers they deem safest. We
also found collusion between intermediaries and loan ofcers, as well as former loan
ofcers becoming moneylending entrepreneurs:
If I had to sell noodles or operate a small grocery store, it would be hard.
[...] It’s nice to do this kind of business. It is easy to do.
I worked at the Klaten ofce of a koperasi from 2005 to 2009. Then
I realised that I will not make much if I kept working in the koperasi.
A. established an additional cooperative in Wonosari, while I and my
friends established here, in Klaten and Solo. A. has a license, I don’t
have license.
The people do not care whether we have licenses or not. What they need is a
quick loan.
Some of the businesses owned by intermediaries are genuine while others purely
serve as a front to obtain funding from formal micronance lenders. Different informal
intermediation business models can be distinguished, with those at the professional
loan shark end of the spectrum beneting most from the availability of formal
micronance. Some of these businesses conduct complex operations that provide
them with multiple revenue streams. Formal lenders do not thoroughly check the
businesses of informal intermediaries and disburse loans without regard to poverty
alleviation objectives. Intermediaries we interviewed told us that, as long as they
pay instalments on time, loan ofcers do not care what the loans are used for.
Provided that informal intermediaries have good credit scores, they can easily obtain
additional loans.

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5. Discussion and implications
Examining micronance effectiveness through the impact it has on competitors
provides a useful lens, helping to identify weaknesses. Micronance initiatives may
well be successful, protable and sustainable if examined in isolation, but that does
not mean they are effective in alleviating poverty and meeting the UN SDGs. Limited
effectiveness would be a concern for both public sector supporters and private
sector TNCs, with their US$9.4 billion stake.
Grounded in the reality of market participants, our ndings hold implications for
international micronance practice, policy and further research. The rst and
foremost UN SDG is to end “poverty in all its forms everywhere” (United Nations,
2017). Within this SDG, the highest priority is given to the eradication of extreme
poverty (SDG 1.1), closely followed by “ensuring…access to…nancial services,
including micronance” (SDG 1.4). Our ndings help explain a lack of sustainable
effect on extreme poverty. Prior studies report that the poorest borrowers benet
less from formal micronance than less-poor borrowers (Islam et al., 2015). Banerjee
et al. (2015), taking a period of six years into account, report that this effect persists
two years after formal micronance is withdrawn. Persistent benets to the poorest
entrepreneurs without prior businesses are “generally indistinguishable from
zero” (Banerjee et al., 2015). Our nding of informal intermediation helps explain
this conundrum. An unintended consequence of formal micronance can be that
it provides informal intermediation opportunities to entrepreneurial individuals,
particularly those who have extant businesses or who are able to portray themselves
as businesses. The poorest of the poor entrepreneurs benet less than the less-poor
do. Hence, informal intermediation appears to be an important but neglected variable
in assessments of the effectiveness of micronance initiatives. We propose to the
international business community to include this variable in large-scale, quantitative
assessments of micronance effectiveness. In aggregate, the propositions suggest
that the larger the extent of informal intermediation, the lower the effectiveness of
micronance initiatives to alleviate poverty among the poorest of the poor (Arp,
2017). Although further qualitative research on unintended consequences of formal
micronance seems advisable, the various propositions contribute to the quantitative
evaluation toolbox of measurable characteristics.
The UN stresses “the importance of designing regulatory and policy frameworks
across all nancial intermediation” (United Nations IATF on Financing for
Development, 2016: 52). Our research ndings on informal intermediation highlight
that key characteristics of informal lending are insufciently recognized. Similarly, our
ndings about the implicit interest of trade nance, which causes borrowers not to
perceive it as lending, deserve the attention of policymakers and comprehensive
further research. So do the other services of trader-nanciers: The UN recognizes

Micronance for poverty alleviation: Do transnational initiatives
overlook fundamental questions of competition and intermediation? 113
that “institutions may require a more qualitative analysis that highlights examples
where different nancial intermediaries have helped advance the nancial inclusion
agenda” (ibid, page 58). Our approach illustrates that poverty alleviation requires
more than “ensuring access to micronance” (SDG 1.4) and quantitatively assessing
nancial effectiveness in isolation. Poor entrepreneurs need operational help: help to
be productive (tools, fertilizer, seeds and the like), help with transport and logistics
(bringing rural and cottage industry products to distant markets) or help during
harvest (when perishable produce quickly spoils). At a minimum, they need help to
operate without the disruption of queuing at ofces for cumbersome processes.
Our ndings of intermediaries’ multiple-source revenue models jives with ideas for
“microcredit-plus programmes” explored by some TNCs such as Allianz and Mars, to
provide practical and social support to clients in addition to capital. Their international
micronance initiatives may benet from examining closely what trader-nanciers do
as those individuals live and work in the community, provide operational help and
cooperate well with the poorest of the poor (cf. Jones, 2008). Providing logistics,
distribution, assured sale of perishable products and price arbitrage between distant
markets (perhaps through mutually owned cooperatives) may be starting points for
TNCs and the international business community. Addressing other operational needs
of the poorest may lead to new forms of microcredit initiatives over time. Some trader-
nanciers can perhaps be coopted and their entrepreneurship harnessed. Policies
could also formalize, support and lightly regulate existing trader-nancier networks
in line with UN SDG 8.3 “to integrate the informal sector into the formal economy”
(United Nations Inter-agency Task Force on Financing for Development, 2016: 19).
Our ndings emphasize that the research agenda must also include human
resource management practices. Methods to examine the crucial role of loan
ofcer incentives deserve particular attention as “monitoring capacity for cost-
effective credit evaluation would require qualitative work” (United Nations Inter-
agency Task Force on Financing for Development, 2016: 58). Collaborative research
involving TNCs holds particular promise, as private sector international expertise
on incentives and appropriate human resource management may be applicable to
domestic government-supported initiatives. The US$9.4 billion stakeholder role of
the international business community demands that TNCs examine the interface
between loan ofcers’ incentives for correct evaluation and the types of credit offered.
To better compete with moneylenders, formal micronance initiatives should also offer
smaller loans, shorter loan periods, daily or weekly payments, quicker disbursement,
simpler procedures and draw-down facilities for multiple, irregular, credit withdrawals
(e.g. inventory purchases available at temporarily low prices). We suggest further
research, including quantitative and mixed methods, on the effectiveness of each of
these characteristics.

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We do not advocate more regulation. In our view, regulations and their enforcement
should solely target coercive intermediation practices at the extreme, loan-shark
end of the informal lender spectrum. What constitutes usury, for example, has been
debated since biblical times at least and will perhaps be debated forever. Instead
of targeting usury, we advocate three groups of measures: rst, learning from,
cooperating with and potentially coopting informal lenders in line with UN SDG 8.3;
second, improving human resource management in micronance organizations
and providing appropriate incentives to loan ofcers; third, ensuring ubiquitous
basic nancial literacy so that the poorest can evaluate whether operational
services provided by informal lenders such as trader-nanciers make up for the
cost of their loans, which is higher more than that of formal micronance. Enabling
micro-entrepreneurs to make educated decisions about formal versus informal
lenders may be as important as ensuring access to multiple micronance market
participants. Financial literacy initiatives could build on the reexivity and worries
of micro-entrepreneurs about self-discipline (Arp and Ardisa, 2016a: 16) and must
include those that are otherwise entirely illiterate. We deem insufcient the UN’s
assessment of nancial literacy through student modules in the Gallup Global
Financial Literacy Survey (United Nations IATF on Financing for Development,
2016: 59).
6. Conclusion
This article’s main purpose is to help set an agenda for further research and discussion.
It makes two interrelated contributions. First is the identication and characterization
of informal microcredit beyond formal lenders that has been examined in prior
research (e.g. Bos and Millone, 2015). Clearly, lending is heterogeneous and the
competition to formal micronance does not only comprise usurious moneylending
by loan sharks.
The second and main contribution of this article is the identication of informal
intermediation as a signicant (current) problem but also a potential (future) element
of sustainable solutions. Micronance organizations need fewer inappropriately
incentivized loan ofcers and more entrepreneurial individuals with a trader-nancier
mindset designing multiple-source revenue models. Our contribution to theory,
that the availability of formal low-interest micronance can create unintended
entrepreneurship opportunities (informal intermediation), needs to be considered in
research and micronance practice.
Our research contributes to the understanding of lending to the poorest of poor
micro-entrepreneurs through its grounded approach and focus on competitive
impact. The debate on micronance effectiveness has persisted because of a

Micronance for poverty alleviation: Do transnational initiatives
overlook fundamental questions of competition and intermediation? 115
lack of focus on the fundamental question of competition. This article deepens
understanding of formal microcredit by detailing why moneylending still thrives when
low-interest micronance is widely available. Neither formal micronance nor research
on its effectiveness operates in a competitive vacuum: Other forms of lending (and
alternative approaches to research) exist. Learning from other market participants
can be useful.
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