Introduction

The microfinance revolution has changed attitudes towards helping the poor in many countries and in some has provided substantial flows of credit, often to very low-income groups or households, who would normally be excluded by conventional financial institutions. Bangladesh is the starkest example of a very poor country, where currently roughly one quarter of rural households are direct beneficiaries of these programs (Khandker 2003). Much has been written on the rapnge of institutional arrangements pursued in different organizations and countries and in turn a vast number studies have attempted to assess the outreach and poverty impact of such schemes. However, amongst the academic development community there is a recognition that perhaps we know much less about the impact of these programs than might be expected given the enthusiasm for these activities in donor and policy-making circles. To quote a recent authoritative volume on micro finance:

“MFI field operations have far surpassed the research capacity to analyze them, so excitement about the use of micro finance for poverty alleviation is not backed up with sound facts derived from rigorous research. Given the current state of knowledge, it is difficult to allocate confidently public resources to microfinance development.” (Zeller and Meyer 2002).

This is a very strong statement of doubt and in part reflects a lack of accurate data, but also in part methodological difficulties associated with assessing exactly what proportion of income and other effects on the beneficiaries of micro credit can actually be attributed to the programs themselves. In recognition of this uncertainty this paper aims to bring together some of the recent evidence that has been accumulating on the impact of microfinance activities on poverty reduction. In particular we ask what is the evidence on three specific issues.

• the extent to which microfinance initiatives have made a lasting difference in pulling households out of poverty on a permanent basis;
• the extent to which microfinance programs reach only the better-off amongst the poor, leaving the ‘core poor’ unaffected;
• how far micro finance is a cost-effective means of transferring income to the poor

These are very basic questions and the fact that they can still be posed reflects the extent of uncertainty in the literature.

The paper is organized in four sections. The first provides a brief overview of some of the features of microfinance activities in Asia, which is our region of focus. The second discusses a few concepts from the poverty literature and links these with microfinance programs. The third surveys the evidence from recent research studies on the first two of the three questions posed above. The fourth section addresses the third question. Since a number of other surveys are also available we give most attention to evidence produced in the last three or four years.¹ Finally we draw some brief conclusions.

The views expressed in this paper are the views of the author/s and do not necessarily reflect the views or policies of the Asian Development Bank Institute nor the Asian Development Bank. Names of countries or economies mentioned are chosen by the author/s, in the exercise of his/her/their academic freedom, and the Institute is in no way responsible for such usage.

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Comment(s)

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1. altafsamo
   (posted 27 March 2008 / 01:42:42 PM)
   
   I think micro finance if implemented in true spirit can do wonders but in countries like Pakistan the impact has not been so impressive although several studies has shown its positive impact. On the ground realities are very different and these need to be addressed by these multilateral donor agencies.
   Most of the loans are not properly utilized.
   Special emphasis is needed to be given on the capacity building of the prospective borrower. Let the borrower train to catch fish themselves by building capacity to utilize the borrowed amount for investment that will benefit them in long run. This will help decrease poverty.
2. muneeb seyal
   (posted 09 November 2007 / 08:42:14 PM)
   
   Well, I guess microfinance is doing a great work.
   Normally banks are not interested in providing funds to poor people.
   It's proved in history that poor are more honest than the rich.
3. Eric
   (posted 26 September 2007 / 10:35:57 PM)
   
   Whereas Micro finance holds the key to poverty education, it is not just the provision of the financial services that matters, information on where to invest and manage the business is equally needed.
4. Syed Shah
   (posted 22 April 2007 / 12:50:06 AM)
   
   Well I think micro finance can play a power full role in poverty alleviation, nature conservation and biodiversity conservation because it has the potential to diversify the source of income for the poor people and hence can result in reducing the pressure on exploitation of natural resources.