Is Microfinance an Ethical Way to Provide Financial Services to the Poor? Microfinance: Are its Promises Ethically Justified?

This article critically examines the effect of microfinance on poverty reduction.

Microfinance promises to help the poor by providing financial services. Its effectiveness on actual poverty reduction, however, is unclear and generates ethical questions. The paper defines poverty broadly to include deficiency in financial as well as human and social capital. It aims to demonstrate that, in a broad sense, microfinance has negative as well as positive effects on poverty. The paper states that:

• Microfinance objective to improve financial access does not necessarily relieve poverty;
• Microfinance should not harm or decrease one form of capital while improving another, in order to be ethical;
• Overall impact of microfinance on the different forms of capital is unclear;
• The argument that access is the most important issue cannot be accepted as an ethical justification of the movement.

Finally, the commercialization of microfinance has led to MFIs becoming more concerned about their financial objectives and less concerned about social ones. As MFIs turn into real financial institutions, becoming financially sustainable and maximizing profit becomes their main objective and poverty reduction becomes an externality.