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Contents Introduction Principles of Microfinance Limitations and Criticisms Implications for Poverty Relief

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.

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.

List of Visuals

1. Map Showing Income by Region
   http://www.unitus.com/graphics/poverty/poverty_map.gif
   Unitus (PO Box 626, Redmond, WA 98073)


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