Vertical Mobility in Access to Finance: A Study on Long-term Microfinance Client Graduation

Principal Investigators: Nikhil Dugal
Research Team: Nikhil Dugal (CMF)
LEAD Centre: Centre for Microfinance (CMF)
Focus Area: Policy & Regulation, Credit
Project Geography: Tamil Nadu
Partner: Two prominent MFIs based in Tamil Nadu
Status: Ongoing


Typically, the increased cost of outreach to the bottom of the pyramid in rural financial markets is due to a lack of credit history of incoming clients and the nature of transactions, which are high in volume and of lower value. Maintaining the financial viability of microfinance thus calls for higher value loans to established customers, which substitutes away from increased outreach to new clients who require smaller loans and lack credit histories. This is the reason that microfinance organizations who aim to be financially independent are said to be reliant on their long-term clients for financial viability.

The traditional perspective on graduation out of poverty assumes that in the long-term, microfinance clients who are entrepreneurs and accumulate capital will graduate to formal banking institutions. However, there is a significant lack of literature on the graduation of long term microfinance clients to formal banking. We still lack information on why entrepreneurial clients don’t actively pursue bank loans if they have managed to pay back at least two loans, accumulated fixed assets and are seeking loans for productive purposes.

There is a need to understand the challenges faced by these mature microfinance clients during the graduation process, namely for those who have already established their business but are still out of the purview of the formal financial sector. The objectives of this short-term research study are to determine:

– The credit requirements of long-term microfinance clients who require loans larger than the amount MFIs are legally allowed to dispense, along with their future business aspirations

– The behavioral and situational factors hindering the graduation of these clients to formal banking

– The financial profitability of their businesses; a valuation of assets they can use as collateral and an analysis of their operational requirements to assess eligibility for obtaining bank loans

– Inquiring as to what resources their MFIs and local banks offer to aid with this transition from microfinance to formal banking

We plan to survey 400 MFI clients and the manager of each MFI branch. Out of the 400 MFI clients, we will survey 200 current clients and 200 clients who have dropped out within the last 12 months.

The survey area will be a tier-three city to ensure respondents have access to finance and to increase focus on behavioral and operational factors hindering graduation.