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 povertyreduction in India. Despite the extraordinary growth of microfinance in India, there have been relatively few studies on itspoverty impact.

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

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

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

The research finds that MFIs in India have succeeded in reaching people who do not haveaccess to formal sector financial services. Microfinance tends to targetpoorer, 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 microfinanceincreases household well-being. In rural areas, well-being is only enhancedwhen loans are used for productive purposes
• MFI clients aremore likely to borrow for investment (60 percent, as opposed to 38 percent ofnon-client households)
• MFIs have contributed to the growth of non-farm employment
• MFIs have a positive impact on women's economic and socialempowerment
• MFIs have a modest, positive impact on children'seducation.

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

The implications of theresearch include:

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