Microfinance as a Development and Poverty Reduction Policy: Is it Everything it's Cracked Up to Be?

This note examines whether microfinance has a positive impact on poverty reduction and social and economic development.

Microfinance is the provision of tiny loans to the poor to help them establish or expand an income-generating activity, and thereby, escape from poverty. For more than 30 years, microfinance has been portrayed as a key policy and program intervention for poverty reduction and bottom-up local economic and social development.

The note examines evidence provided by impact evaluations, and reasons why microfinance has been unable to address poverty. It recommends:

• More focus on other interventions such as local financial systems and poverty reduction models with a good track record;
• More use of simple cash grants and conditional cash transfers;
• Refocus on promotion of local microsavings as a first step in accumulation of local capital;
• Robust financial sector regulations to ensure that local financial institutions facilitate economic development;
• Promotion of genuine community-owned and controlled financial institutions such as credit unions, building societies and savings banks;
• Pro-active local financial institutions and local industrial policies that can provide ‘patient capital and promote sustainable growth-oriented businesses.