Analysis of the Effects of Microfinance on Poverty Reduction

There is evidence to support the positive impact of microfinance on poverty reduction, especially on income smoothing and income increases. But there are doubts about the actual capacity of MFIs to reach the poorest of the poor. This paper analyses the effects of microfinance on poverty reduction and points out that:

• Microfinance is not for everyone;
• Sick, mentally ill, and destitute are not good candidates for MFIs, but they should rather receive direct assistance;
• Microfinance can be effective also for the poorest because there is no proof of either an inverse relationship between a client's level of poverty and their entrepreneurial skills or minor inclination to save among the poorest;
• It is not true that only people with an existing entrepreneurial activity can benefit from microfinance;
• MFIs enable the poorest to improve their socio-economic conditions only if an appropriate program design and targeting are implemented;
• Impact of microfinance can increase when it is provided together with other social services such as education and health.

The paper concludes with a series of recommendations for the Canadian International Development Agency (CIDA):

• CIDA should review its existing microfinance programs to determine the current poverty levels of its clients;
• CIDA funds should be allocated directly to programs which target the poorest;
• More resources should be used for financial and social impact assessments.