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Money matters – can microfinance reduce poverty?

Microfinance, or small-scale credit and savings services, is widely acclaimed as a sustainable means of reducing poverty. Its potential for redistribution appeals to the political left and its promotion of entrepreneurship to the right. As a tool to aid social and economic development, microfinance has been vigorously promoted. But can microfinance programmes do enough to eliminate poverty?

Recent Save The Children research reports that some practitioners urge caution, suggesting that perhaps the benefits are exaggerated and that by helping poor people to survive better, microfinance distracts attention away from the root causes of poverty. Nonetheless, a review of Save the Children’s own work showed that participants greatly valued these programmes and felt they had improved their quality of live in various ways.

Microfinance may be an important tool for social and economic development but alone cannot eliminate poverty or transform social relations. Is it always the most appropriate intervention? In isolated areas where markets are limited, microfinance may be less effective than alternative approaches that support the poorest people’s livelihoods, such as training or providing basic services and grants. Microfinance can help reduce vulnerability, although improvements to livelihood security are usually more incremental than the dramatic success stories often quoted.

Findings suggest that:

Taking a loan is risky and borrowers can become impoverished if an investment fails.
Microfinance can improve children’s welfare through raising incomes, improving nutrition, housing, health and school attendance, reducing harmful child labour and eliminating some of the stigma attached to being poor.
Microfinance can be important in enhancing women’s economic activities, although the extent to which gender relations can be transformed and women empowered depends on the cultural and social context.
Without external inputs to build up microfinance initiatives, programme scale and impact is likely to be small, while donor or self-imposed pressure to become self-sustaining can result in the exclusion of the poorest people.

The review suggests that a narrow set of approaches are being promoted as best practice, focusing on rapidly achieving financial sustainability and providing ‘stand-alone’ microfinance services by the private sector rather than integrating them into other development activities. Recommendations for expanding the quantity and improving the quality of services include:

Recognising a role for development organisations in scaling up existing services; linking clients and services; providing services in areas not served by the private sector; developing local capacity; and advocacy for responsible behaviour on the part of microfinance initiatives.
Addressing a number of programme design issues, including providing microfinancial services relevant to the very poor; tailoring services to clients’ needs; slowing down the pressure to become financially sustainable; deciding in context whether to provide stand-alone services or integrated programmes
Implementing a rigorous impact assessment of programmes to provide information for modifying programmes and improving impact.
Exploring and experimenting with different options to overcome programme design flaws.
Analysing further issues such as how savings and loans can protect livelihoods and the links between women’s greater economic independence and children’s well being.

Source(s):
'Money Matters. Understanding microfinance', by Rachel Marcus with Beth Porter and Caroline Harper, Save the Children Working Paper #19, Save the Children (1999)

Funded by: Save The Children

id21 Research Highlight: 27 March 2001

Further Information:
Rachel Marcus
Save the Children
7 Grove Lane
London SE5 8RD
UK

Tel: +44 (0) 20 7703 5400
Fax: +44 (0) 20 7703 2278
Contact the contributor: r.marcus@scfuk.org.uk

Save the Children, UK

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