Microfinance: Does it harm or help those financed?

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Microfinance, or the “banking and/or financial services targeted to low-and-moderate income businesses or households”, is traditionally given internationally with the goal of allowing individuals of developing nations to receive the capital they need to start a profitable business.

Ever since the start of the new millennium, much money and attention have been put into utilizing microfinance to decrease poverty in the developing world.

Empowering Women and Helping Aid Communities After Natural Disasters

The literature of microfinance does point to the notion that microfinance empowers women and allows them to participate more economically in their society.

In fact, microfinance increases the consumption expenditure when the recipients are women. Similarly, women who receive microfinance make more use of health insurance than women who do not.

Likewise, microfinance loans made to victims of natural disasters, such as tsunamis, quickly reduced the income gap between those who were affected by the natural disaster and those who were not.

No Findings of Sustained Poverty Reduction

However, despite the optimistic results microfinance seems to have on the empowerment of women and on disaster relief, there is not much evidence that states that microfinance leads to sustainable decreases in poverty.

One such reason is that interest rates are often very high on microfinance loans; they are rarely less than 20%.

Although there are some situations where profits due to the loans exceed the high-interest rates, these situations were found to be the exceptions rather than the norms in both urban and rural areas.

Bottom Line

Microfinance has not been shown to sustainably decrease poverty in both urban and rural areas. For this reason, any NGOs who are working to sustainably reduce urban or rural poverty should search for another way to do so.

Microfinance has been shown to benefit women and improve recovery after natural disasters. For this reason, any NGOs who are seeking to empower either of these groups should consider making microfinance accessible to these groups.

For this reason, microfinance should be considered as a tool to facilitate recovery in impoverished areas stricken by natural disasters, but NGOs should not utilize microfinance as a method of sustainably decreasing poverty in the long-run.

TJ is a third year economics student studying business analytics and finance.
More posts by Thomas Junghyun Yoo.
Microfinance: Does it harm or help those financed?
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