The Impact of Microfinance Services: Increasing Income or Reducing Poverty?

It is important to recognize the difference between increasing income and reducing poverty when assessing the impact of microfinance programs. The manner in which the microfinance client uses the increased income is as important in determining poverty, as the level of the income itself.

Drawing from various research publications, this paper examines:

• Should we be worried about increasing income or reducing poverty?
• What is the importance of diversified sources of income?
• Have minimalist microfinance services made a substantial difference?
• What about serving the poorest of the poor?

As per the paper, measuring impact through changes in income may pose the following challenges:

• Respondents may provide false information if the loans have been put to alternate uses;
• Establishing a relationship of the beneficiary state to the loan requires a knowledge of all her fund sources;
• It is difficult to understand what could have happened in the absence of the loan.

The paper further states that:

• It is important to have multiple sources of income to reduce risk exposure against illness, theft of assets, natural disaster etc.
• Reduction of poverty must be a continuous process of asset-creation, so that the asset-base of the poor client becomes stronger at each economic cycle;
• Self-employment, leading to creation of client assets, is generally considered to be more prestigious than wage employment in rural areas.

The paper concludes, highlighting the following points:

• Microfinance services empower the poor to cope with and overcome financial shocks;
• The focus should shift from raising income to improving net wealth and income security;
• The way in which a client uses the income is as important as the income itself;
• Diversified income sources reduce the poor person's exposure to catastrophic income loss;
• Quality should be of prime concern while creating businesses that provide jobs.