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e-Journal

 

The Promise of Microfinance for Poverty Relief in the Developing World
(Released May 2007)

 
  by Matthew Ruben  

Review

Key Citations

Resources

Glossary

Editor
 
Implications for Poverty Relief

Contents

Muhammad Yunus famously makes the claim that access to credit is a human right. At a minimum, the microfinance movement has highlighted the great need for financial services in economic sectors not otherwise targeted by banks. It is certainly true that most poor people don't have access to formal financial services. It is equally true that there remain a vast number of poor people.

map showing income by region

By World Bank estimates, more than a third of the world's population lives on less than $2 a day, and for-profit banks have established that they don't see enough of an economic incentive to reach this segment of the world's population. Microfinance institutions can not only make it easier for the very poor to secure small loans, they also have proven, in some circumstances, to be able to help create jobs and income, improve agricultural productivity, empower women, and give the poor access to better nutrition and improved housing. (Wahid)

However it has been established that microfinance providers face a great many decisions about what strategies will reach the most people, help the most people, and help the poorest people. Microfinance institutions must also decide whether to concentrate on lending or provide other services. Furthermore, microfinance institutions may not always be particularly helpful, particularly regarding rural communities, as well as in areas lacking in basic infrastructures, ravaged by AIDS, or suffering from hyperinflation.

At a minimum, the widespread adoption of the microfinance model appears a very positive step. Traditional aid might be able to set up schools and hospitals in poor communities, and opening up trade barriers might come with a promise of benefits of improved infrastructure and services to poor communities. But microfinance allows a poor person the opportunity to affect the welfare of his or her own family directly. Roads and schools and drinking water are critical, but not as helpful to a poor person who can't afford to borrow money from a traditional moneylender to purchase husked rice for the harvest.

Nevertheless, it is also probably true that the best anti-poverty strategy is to use microcredit along with other social investments, not just to reduce poverty, but to expand a country's basic social resources. Employment programs and education programs can make the poor more employable. Improvements in public infrastructure, and the introduction of schools and hospitals can benefit communities. And all programs require a legal and regulatory framework, which is controlled on the policy level. Microfinance by itself would be more effective in conjunction with policies that bring other services to poor communities as well. Microfinance can only go so far in a country suffering from hyperinflation. Microfinance programs are not the best way to bring safe drinking water to a community. Microfinance is limited in countries lacking in proper health care infrastructure and funding.

The popularity of microfinance in any form has the potential to distract from other vital antipoverty measures. It would be easy for donors and governments to create and fund credit programs and ignore other, potentially more serious problems faced by the rural poor. Microfinance by itself does not solve the need for medical services, infrastructure, education, and land reform. The 1998 UN report The Role of Microcredit in the Eradication of Poverty recommends microfinancing as one part of a larger effort for promoting small business enterprise. The other components include improving access to land, appropriate technology, and markets, as well as promoting self-help groups and counseling to help poor people successfully manage small businesses.

But microfinance certainly has the potential to fill a vacuum that has existed for far too long. And for all its hype, microfinance still has a lot of room to grow. Within Asia, more poor people benefit from microfinance institutions in Bangladesh, Thailand and Vietnam than in China or India. (Weiss and Montgomery, 393) One hopes that microcredit will spread to untapped areas. And one hopes its spread will be accompanied by an appropriately diversified antipoverty plan.

© 2007, ProQuest CSA LLC. All rights reserved.

List of Visuals

References

  1. Abbink, Klaus, Bernd Irlenbusch, and Elke Renner. 2006 "Group Size and Social Ties in Microfinance Institutions" Economic Inquiry 44 (4), 614-628.

  2. Adams, Dale W. and J.D. von Pischke. 1992 "Microenterprise Credit Programs: Déja vu" World Development 20, 1463-1470.

  3. Ahmad, Mokbul M. 2003 "Distant Voices: The Views of the Field Workers of NGOs in Bangladesh on Microcredit" Geographical Journal 169 (1), 65-74.

  4. Anthony, Denise. June 2005 "Cooperation in Microcredit Borrowing Groups: Identity, Sanctions, and Reciprocity in the Production of Collective Goods" American Sociological Review 70 (3), and Arvind Singhal. 1992 "The Diffusion of Grameen Bank in Bangladesh: Lessons Learned About Alleviating Rural Poverty" Knowledge 14 (1), 7-28.

  5. Auwal, Mohammad A. 1992 "The Diffusion of Grameen Bank in Bangladesh: Lessons Learned About Alleviating Rural Poverty" Knowledge 14 (1), 7-28.

  6. Brett, John A.2006 "'We Sacrifice and Eat Less': The Structural Complexities of Microfinance Participation" Human Organization 65 (1), 8-19.

  7. Coleman, Brett E. 2006 "Microfinance in Northeast Thailand: Who Benefits and How Much?" World Development 34 (9), 1612-1638.

  8. Elson, Diane. 1995 "Household Responses to Stabilization and Structural Adjustment: Male Bias at Micro Level," Male Bias in the Development Process Diane Elson, ed.

  9. Fernando, Nimal A. 2006 Understanding and Dealing with High Interest Rates on Microcredit: A Note to Policy Makers in the Asia and Pacific Region Asian Development Bank http://www.adb.org/Documents/Books/interest-rates-
    microcredit/Microcredit-Understanding-Dealing.pdf
    .

  10. Goetz, Anne M. and Rina S. Gupta. 1996 "Who Takes the Credit? Gender, Power, and Control over Loan Use in Rural Credit Programs in Bangladesh," Gender and Development: Theoretical, Empirical and Practical Approaches, vol 2. Beneria, Lourdes and Savitri Bisnath, eds., 94-112.

  11. Gow, Kathryn N. Summer 2000 "Banking on Women: Achieving Healthy Economies through Microfinance" WE International 48/49, 11-13.

  12. Hashemi, Syed M., Sidney R. Schuler and Ann P. Riley. 1996 "Credit Programs and Women's Empowerment in Bangladesh" World Development 24 (4), 635-653.

  13. Hemingway, Mark. Sep 2004 "Real Business, Real Small" The American Enterprise 15 (6), 53.

  14. Hughes, Denise and Anna Awimbo. 2000 "Microcredit: Moving Women Forward" United Nations Chronicle 37 (2), 75.

  15. Milgram, B. Lynne 2001 "Operationalizing Microfinance: Women and Craftwork in Ifugao, Upland Philippines" Human Organization 60 (3), 212-224.

  16. Perry, Donna. 2002 "Microcredit and Women Moneylenders: The Shifting Terrain of Credit in Rural Senegal" Human Organization 61 (1), 30-40.

  17. Prosterman, Roy. Apr 2005 "The U.N.'s Empty Plan for Poverty" Far Eastern Economic Review 168 (4), 43-45.

  18. Rajan, Raghuram. Mar 2006 "Separate and Unequal" Finance and Development 43 (1), 56-57.

  19. Schreiner, Mark. May 2003 "A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh" Development Policy Review 21 (3), 357-382.

  20. United Nations. 2005 Investing in Development: A Practical Plan to Achieve the Millennium Development Goals, http://www.unmillenniumproject.org/reports/fullreport.htm.

  21. van Bastelaer, Thierry, and Howard Leathers. Oct 2006 "Trust in Lending: Social Capital and Joint Liability Seed Loans in Southern Zambia" World Development 34 (10), 1788-1807.

  22. Wahid, Abu N. M. Jan 1994 "The Grameen Bank and Poverty Alleviation in Bangladesh: Theory, Evidence and Limitations" American Journal of Economics and Sociology 53 (1), 1-15.

  23. Weiss, John, and Heather Montgomery. Sep-Dec 2005 "Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America" Oxford Development Studies 33 (3-4), 391-416.

  24. Yunus, Muhammad 1998 "Poverty Alleviation: Is Economics Any Help? Lessons from the Grameen Bank Experience" Journal of International Affairs 52 (1), 48-65.

  25. Yunus, Muhammad 1999 Banker to the Poor: Micro-Lending and the Battle Against World Poverty (USA: PublicAffairs).

  26. Yunus, Muhammad 2003 "Halving Poverty by 2015: We Can Actually Make It Happen" Round Table 363-375.

  27. Yunus, Muhammad Nov 27, 2006 "Interview - 'Poverty is a Threat to Peace. Extreme Poverty Destabilizes Societies. Microcredit Helps Reduce That Threat.'" MacLean's 119 (47), 16-17.