Microfinance reduces poverty and vulnerability in India

Microfinance institutions (MFIs) not only help poor people get out of poverty, they also help reduce their vulnerability to unexpected events such as drought. In India, where poverty remains a huge problem and most poor households are also vulnerable, what impact is microfinance having?

Research from the University of Manchester in the UK and EDA Rural Systems in India assesses the impact of microfinance on poverty reduction in India. Despite the extraordinary growth of microfinance in India, there have been relatively few studies on its poverty impact.

The research draws on a nationwide survey carried out in 2001 for the Small Industries Development Bank of India (a formal finance sector organisation with a microfinance programme). The research assesses the poverty reduction impact on client households and compares this with non-client households. It aims to capture the many aspects of poverty by using a range of measures including: income, land holdings, livestock, other assets, housing and sanitation.

Microfinance programmes have succeeded in serving poor clients where formal finance sector service providers have not. This success has been attributed to factors such as better local knowledge, better information about clients and the use of peer-group monitoring (where microfinance clients themselves monitor loans).

In recent years microfinance programmes have adapted to address different aspects of poverty – basic needs, vulnerability, capabilities and so on. The focus has shifted from providing loans to providing a range of financial services which help meet the complex livelihood needs of poor people.

The research finds that MFIs in India have succeeded in reaching people who do not have access to formal sector financial services. Microfinance tends to target poorer, mostly female-headed households. MFI services in India reach all castes and communities.

The research finds that:

• MFIs play an important role in reducing poverty and vulnerability
• in urban areas, simply having access to microfinance increases household well-being. In rural areas, well-being is only enhanced when loans are used for productive purposes
• MFI clients are more likely to borrow for investment (60 percent, as opposed to 38 percent of non-client households)
• MFIs have contributed to the growth of non-farm employment
• MFIs have a positive impact on women's economic and social empowerment
• MFIs have a modest, positive impact on children's education.

Most poor households in India are not only poor, but are also vulnerable to unexpected events. MFIs reduce vulnerability by helping clients to diversify their income sources, build-up assets and save. In rural areas, using loans for productive purposes is particularly important in helping poor people escape poverty and protect themselves from shocks.

The implications of the research include:

• Monitoring loan use in microfinance programmes is important.
• Encouraging the use of loans for productive purposes is also important.
• In India, more emphasis should be placed on the potential for microfinance to reduce poverty in both urban and rural areas.

Source(s):
`Does the Microfinance Reduce Poverty in India? Propensity Score Matching based on a National-level Household Data', Development Economics and Public Policy Working Paper 17, IDPM: Manchester, by Thankom Arun, Katsushi Imai and Frances Sinha, 2006 Full document.

id21 Research Highlight: 9 March 2007

Further Information:
Thankom Arun
Institute for Development Policy and Management
University of Manchester
Harold Hankins Building
Precinct Centre
Booth Street West
Manchester, M13 9QH
UK

Tel: +44 (0)161 2752820
Fax: +44 (0)161 2738829
Contact the contributor: tg.arun@manchester.ac.uk

Institute for Development Policy and Management, University of Manchester, UK

Katsushi Imai
Economics, School of Social Sciences
University of Manchester
Oxford Road
Manchester M13 9PL
UK

Tel: +44 (0)161 2754827
Fax: +44 (0)161 2754928
Contact the contributor: Katsushi.Imai@manchester.ac.uk

Economics, School of Social Sciences, University of Manchester, UK

Frances Sinha
EDA Rural Systems
602 Pacific Square
32nd Milestone NH8
Gurgaon 122 001
India

Tel: +91 124 2309493
Fax: +91 124 2309520
Contact the contributor: francessinha@edarural.com

EDA Rural Systems, India

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'Testing the impacts of microfinance on women'

'Microcredit, infrastucture and poverty alleviation programmes in urban Bangladesh'

'Realising the potential of microfinance' id21 insights #51, December 2004

'Making microfinance meaningful – “the triple bottom line” approach in South Africa'