Microfinance as a Poverty Reduction Policy

This essay critically evaluates microfinance and its effect on poverty reduction.

Microfinance services for the poor have grown, and microfinance has become one of the most popular poverty reduction strategies in the world. The essay states that microfinance:

• Cannot solve the poverty problem because it is too complex an issue;
• Has positive outcomes on self-employment, income generation, consumption smoothing, and social development of clients;
• Helps improve the nutritional health of families and status of women;
• Is unable to reach the very poor, provide education, and have large scale impact;
• Commercialization may have negative consequences for the poor.

Going forward, global and regional Emerging Processes and Issues Clusters can provide suggestions on how microfinance programs can adapt to changes. MFIs should find better ways to measure poverty reduction impact. They should increase educational and capability enhancing activities. Finally, MFIs should reach the chronically poor and decide on trade-offs to become self-sustainable.