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The microfinance sector in Eastern Europe and Central Asia (ECA) remains limited in scale. Its microfinance institutions serve, on average, the smallest number of borrowers of any region, making loans nearly twice as large as in any other region, with limited savings mobilization. However, the region presents one of the best opportunities to observe a central issue for the industry: the integration of microfinance services with the formal financial sector, where locally operating banks and other institutions targeting higher-income markets are able to leverage scale and reduce costs per loan in order to address lower-income segments.

The development of microfinance in the ECA region illustrates some of the potential trade-offs between outreach and financial performance. Commercial funds have been primarily directed at higher-end microfinance institutions, while those institutions focusing on lower-income populations are funded through donated funds and retained earnings. Smaller institutions in the EU accession countries have the hardest time recovering costs; this is also largely true for credit unions.

At the same time, NGOs and non bank financial institutions in the weaker financial sectors of Central Asia and the Caucasus have extremely high levels of self-sufficiency and have seen significant growth in the past. In countries with deeper financial sectors, however, microfinance institutions have lower interest rates on microcredit products, narrower profit margins and higher delinquency levels.

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