Is it possible to replicate a successful microfinance model on a large scale: The case of Korea

○ Survey of literature Microfinance is the provision of small scale loans to people who lack access to traditional banking services. The term microfinance usually implies very small loans to poor people for... [ view full abstract ]

○ Survey of literature

Microfinance is the provision of small scale loans to people who lack access to traditional banking services. The term microfinance usually implies very small loans to poor people for self-employment, often with the simultaneous collection of small amounts of savings. Microfinance should be understood as the combination of both alternative finance model and alternative welfare model. The aspect of the former is concerned with information asymmetries and agency problems in the process of lending which have not been solved in the realm of traditional finance(Armendáriz & Morduch. 2010. The Economics of Microfinance). The aspect of the latter is concerned with new challenges to the welfare system which depends on government too much and ignores the importance of the self-support and self-reliance through entrepreneurship(Schreiner & Morduch. 2001. Replicating microfinance in the United States).
To get around these problems, the Grameen Bank developed a series of innovative techniques and gave the most successful micrfofinancial model to the world(Yunus, Muhammad. 1999. Banker to the Poor). The success of Grameen model have triggered replication efforts worldwide. This movement has spread even to the United States. Microfinance programs in the United States are concerned about much more than the extension of credit. Many programs take a holistic approach, offering interconnected services that complement lending activities(Schreiner & Murduch 2001).

In Korea the microfinance came to the spotlight as a self-help oriented solution to the problem of ‘economic polarization’ and ‘structured poverty’. Especially, financial crisis in 1997 and the credit card crisis were the critical turning point to launch the Korean microfinance movement. The Joyful Union, the first microfinance institution in Korea, was founded in 2000 and the Social Solidarity Bank, the largest microfinance institution in Korea, was established in 2003.

The microfinance institutions in Korea recorded impressive results, and came into the spotlight as a self-help oriented solution. However, the processes of spreading and replicating its success is hardly to be assessed as successful. The people at the SSB thought that dormant deposit could be a stable source of funding for expanding the number of clientele. In the year of 2008, government established Dormant Deposit Management Foundation. SSB hoped upgrading the Korean microfinance through dormant deposit and this foundation which would become new headquarters of Korean microfinance. However, its consequences are different from their expectations. The foundation that was controlled by government officials who excluded existing microfinance organizations and exerted a very different type of microfinance activities.

○ Research questions

· What are the main characteristics of Korean microfinance business model which are differentiated from other microfinance models such as Grameen model or USA model?
· What are the strategy for expansion of microfinance in Korea?
· What are the main causes of decline in Korean microfinance activity?
· Is it impossible to replicate a successful model in microfinance on a large scale?
· Of what factors should we take notice in order to spread the successful microfinance model into a nationwide scale

○ Methodology

This research aims at clarifying the main characteristics of Korean microfinance business model and understanding the main causes of decline in Korean microfinance activity and exploring the factors to be able to replicate the successful model on a nationwide level. In order to explore the research question, both quantitative and qualitative research method that include interviews with practitioners will be used.

○ Keywords

microfinance, Grameen model, Social Solidarit Bank, Korean model, replication