Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America

This paper examines the following three issues while assessing the impact of microfinance institutions (MFIs) on poverty reduction:

• Success of microfinance programs in reaching the core poor;
• Effectiveness of microfinance initiatives in pulling households out of poverty;
• Cost effectiveness of microfinance as a poverty-targeting tool.

The paper summarizes the following key findings from various impact assessment studies carried out in Asia and Latin America:

• In general, a positive impact is found on borrower incomes of the poor;
• Gains are larger for non-poor borrowers;
• Borrowing by males appears to have no significant impact on consumption, while the same by females does have a positive impact;
• Experimentation and local variation are important aspects of successful MFIs;
• The NGO programs appear to score over government-run programs, both in terms of conventional financial criteria like repayment rates, as well as measures of initial impact like targeting effectiveness;
• Training, in conjunction with credit, appears to work well;
• Availability of savings facilitates asset growth amongst households.

The author concludes by stressing on the need for a more rigorous research on the outreach, impact and cost-effectiveness of microfinance programs. This would facilitate in the donor community's understanding of the role of microfinance in reaching the poor, its impact in different environments, and its cost-effectiveness as a poverty intervention.