MICROFINANCE A KEY TO POVERTY ALLEVIATION

The current global Perception of microfinance

In the global arena there is already the impression that microfinance is successful in reducing poverty. Many policy makers are therefore engaged on how to make microfinance sustainable and available to many poor households in the future. Many stake holders in the microfinance industry especially donors and investors argue that, “Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor households” (CGAP). The overall message in this argument is that unless microfinance providers charge enough to cover their costs, they will always be limited by the scarce and uncertain supply of subsidies from governments and donors. The main underlying assumption in this argument is that microfinance is already good for the clients, and therefore what is really urgent is to make the financial service available to as many poor people as possible. Morduch (2000) correctly points out that this kind of enthusiasm for microfinance rests on an enticing win-win proposition that: Microfinance institutions that follow the principles of good banking will also be the ones that alleviate the most poverty.

The assumption being that with good banking practices it is possible to cover costs and operate in a sustainable manner to continue serving clients and alleviating poverty (Morduch 2000).The “win-win” situation both for the investor and the poor can be explained as follows: The investor in microfinance programs follows good banking practices with the possibility of some profit, while the poor continue to benefit by accessing reliable credit that is assumed to be beneficial to their welfare. The supporters of the “win- win” proposition stress (mainly by assumption) that the ability to repay loans by the poor is a good indicator that whatever investments the poor make with their micro credit loans must be giving back profits. Given the assumption that microfinance is already beneficial to the poor, the “win-win” proposition further assumes that the amount of house hold poverty reduced is directly proportional to the number of households reached with microfinance.

The “win-win” vision has been translated in to a series of “best practices” circulated widely by a number of key donors including the Consultative Group to Assist the Poorest (CGAP). CGAP is a consortium of NGOs hosted at the World Bank. Other donor organizations that embrace “best practice microfinance” include, United States Agency for International Development (USAID) and the United Nations Development programme (UNDP) among other key donors. It is important to note that the proposal of a commercial approach to microfinance for the poor has been questioned by socially oriented service providers. Especially the assumptions underlying the “win-win” proposition have raised eye brows among socially oriented service providers who question the validity of such assumptions in the real world.

Justification

Rigorous empirical analysis in the issue of statistical impact of microfinance began in the1990s. The studies so far remain few and the results of these studies are highly provocative. The first school of thought questions the relevance of microfinance as a poverty reducing policy in the first place. (Adam & Von Pische, 1992) argued that “debt is not an effective tool for helping most poor people to enhance their economic condition be they operators of small farms or micro entrepreneurs”. The main argument of Adam and Von Pische (1992) is that there are other more important constraints that face small agricultural households and they include product prices, land tenure, technology, market access and risk. Also in support of the same view is Gulli (1998) who argues that credit is not always the main constraint for micro enterprises´ growth and development, and that poor people demand a wide range of financial, business development and social services for different business and household purposes. In a close rejoinder Mayoux (2002) argues that the logical assumption of virtuous spiral of economic empowerment to the household due to microfinance does not in reality exist. This is particularly so given that there exists gender relations in society in relation to loan uses; a scenario that more often that not leaves poor women borrowers highly indebted, and not much wealth to show for it (Mayoux 2002).

As though to counter the negative arguments against the impact of microfinance on poverty reduction, other studies have found that microfinance is relevant to poverty reduction not just for the beneficiaries but also there are positive spillover effects to the rest of the community (Khandker 2006). In his study Khandker (2006) uses a panel household survey from Bangladesh and observes that access to microfinance contributes to poverty reduction, especially for female participants, and to the overall poverty reduction at the village level. Pitt and Khandker (1998) find, using data from three programs in rural Bangladesh, that borrowing from group-lending schemes increased consumption of poor households. However, Morduch 1998b has argued that Pitt and Khandker’s result reflect program selection effects rather than the impact of borrowing per se.

There are also other studies that seem to support to some extent the relevance of microfinance in poverty reduction. Morduch (1999) argues that microfinance has had positive impact on poverty reduction. However he is keen to add that “Even in the best of circumstances, credit from microfinance programs helps fund self employment activities that most often supplement income for borrowers rather than drive fundamental shifts in employment patterns. It (microfinance) rarely generates new jobs for others and success has been especially limited in regions with highly seasonal income patterns and low population densities (Morduch 1999)”.