Microfinance and Poverty: Questioning the Conventional Wisdom

This study examines assumptions that have arisen about microfinance and poverty reduction:

• Microentrepreneurs are poor;
• Microentrepreneurs are constrained by inadequate access to credit;
• Microfinance institutions aim for poverty reduction.

The paper concludes that microfinance can play an important role in poverty reduction, but its benefits are not only poverty-related, and it is only a partial tool for poverty reduction. Recommends that the following actions can be taken on different levels to expand the outreach and impact of microfinance programs:

• The quality of financial services can be improved to enhance their responsiveness to the needs and demand of poorer customers;
• The depth of outreach can be expanded through provision of financial services that are tailored to the needs of the poorest and their economic activities, provision of a variety of financial products to suit different household and business needs, and promotion of pilot projects aimed at the poorest households and areas;
• The scale of outreach can be expanded through promotion of an enabling environment for small-scale financial transactions and microfinance methodologies, provision of a wide range of financial services, enhanced focus on savings mobilization, transformation of NGOs to commercial MFIs, and competition that ensures low cost and high quality services;
• The geographical outreach can be expanded through regulations and policies that facilitate expansion to remote areas, local infrastructure that enables provision of small-scale financial transactions, and promotion of pilot, rural MFIs;
• Income impact can be improved through complementary income-generating interventions enhancement of access to productive assets, improvement of the quality of assets, and promotion of an enabling environment for productive use of assets. Complementary non-financial services, such as business development and social services and community development, may also be helpful.

[Adapted from author's abstract]