Influence of Microfinance on Poverty Reduction: A Literature Review

Abstract

The purpose of this literature review is to understand the impact of microfinance on poverty alleviation as evidenced in other studies conducted in various socio-economic environments. Microfinance is the provision of financial services, including small loans and savings products, specifically designed to assist low income clients. Microfinance is designed to mitigate the effects of financial vulnerability and low economic empowerment. The literature reviewed suggested a combination of results, most of which were positive. Some of the studies concluded that microfinance increased income at the household level, increased the level of entrepreneurial activity and improved the level of educational and health services accessed. Increased financial independence and the ability to take decisions were noted as benefits for women. Nevertheless, poverty alleviation impact level is different based on the location and the design of the program. There are scholars who are of the opinion that microfinance may reach the so called poverty line and refuse to move or may create a cycle of poverty because of the business environment which is impotent to sustain the level of repayments. There is also a notion that microfinance should be complemented by social safety nets, horizontal and other vertical programs for it to really work. The greater part of the scattered evidences on microfinance agree that microfinance by itself is not a developmental poverty alleviation instrument. There are other wider frameworks for development that microfinance works with. There are also some positive evidences that coping strategies and micro finance program are also contextually adaptable so as to increase the level of impact that is obtained.

Keywords: Microfinance, Poverty Reduction, Financial Inclusion, Empowerment and Economic Development.