Microfinance: Does it Hold its Promises? A Survey of Recent Literature
This paper attempts to understand the various microfinance initiatives globally, and its achievements so far, by reviewing existing literature. The author introduces the topic of microfinance by providing the contextual background. She discusses the following three objectives of microfinance with reference to the market and existing studies:
- Poverty alleviation;
- Women empowerment;
- Financial sustainability, outreach and impact: The triangle of microfinance.
Through case studies, the paper discusses the pioneers in the microfinance sector - the Grameen bank, The Bank Rakyat of Indonesia and The Village Banks (FINCA). It also presents the various concepts that led to the development of microfinance as we know it now:
- Peer selection with group lending serving as the collateral;
- Peer monitoring using the group lending mechanism;
- Dynamic incentives in the form of incrementally larger loan sizes to groups with good repayment rates;
- Regular repayment schedules;
- Other collateral substitutes such as group funds used in cases of emergencies;
- Rotating Savings and Credit Associations (ROSCAs) and Accumulating Savings and Credit Associations (ASCAs).
According to the author:
- The limitation of all existing literature in microfinance is the lack of empirical evidence of the impact of microfinance;
- Although empirical research is not an easy task, given the nature of the sector, it will help in improving existing programs and policies.
Finally, the paper outlines the impact of microfinance so far. She concludes by stating the positive effects of microfinance on poverty alleviation and briefly outlines the future direction for the sector.
