Deconstructing 4 Microfinance Myths

This paper analyzes the welfare impact and value-addition of targeted microfinance market interventions for the poor.

The study involved 64 low and middle-income households in rural and urban southern India on their use of various financial products, services and instruments. Findings include:

• Respondents borrow for several reasons other than enterprise development;
• It is important to dissociate microfinance from small enterprise development to objectively assess its welfare impact along multiple dimensions;
• Microfinance remains one among many formal, semi-formal and informal savings and credit channels used by poor households;
• There appears to be some link between being marginally better-off and being affiliated with microfinance in some form;
• Microfinance loans at 24-36% interest rates are considered cheap, demonstrating that attractive terms of finance involve much more than just the stated interest rate.

The papers findings contradict popular rhetoric on microfinance, and provide information to people and institutions interested in using market mechanisms to alleviate poverty.