Does Microfinance Help Poverty Alleviation

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As per World Bank’s report issued in 2018, 783 million people out of 4560 million of Asia are extremely poor who are living below the poverty line of US $1.9 a day. Poverty solely describes the economic stability of any country. Through Poverty lifelong troubles passed from one generation to another which mainly includes no school/education, child labor, health problems, backward industry, terrorism and much more as list goes on. In Asia, poor living in urban areas are increasing day by day as compared to rural areas and urban poverty appears to be a growing challenge Asia has to face as the economy becoming more prosperous and urbanized. According to Mary Barringer 10% rise in a per capita income will reduce poverty by 20%-30% (Barringer) Per Capita Income or country’s average income can be increased by either enabling more people to earn or by increasing the average earning of an individual on which family including women and children are rising. The unemployment rate in the Asia is the world’s lowest at 4.1 per cent. (Employment and unemployment in Asia-Pacific: Trends and projections).

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So to cope with the situation Micro financing is the best solution. Micro financing is a financial service through which unemployed and low income individuals get benefits to excel and earn more in those situations when they have no other financial services or resources. The ultimate objective of micro financing is to enable everyone to be self-sufficient. Microfinance is an 18th century’s concept introduced by Jonathan Swift. First micro lending is attributed to the Irish Loan Fund system aims to improve conditions for impoverished Irish citizens. Afterwards it became popular in 1970’s (History of Microfinance).The first organization to receive attention was the Grameen Bank founded in 1976 by Muhammad Yunus in Bangladesh. Apart from providing loans to its clients, the Grameen Bank also suggests that its customers subscribe to its '16 Decisions,' a basic list of ways that the poor can improve their lives. According to the World Bank an approximate of 500 million people managed to get benefit directly or indirectly from micro financing operations. There are almost 123 million customers at microfinance institutions worldwide. and Asia has 23.5% growth rate in terms of attaining micro finance loan in 2016. So the facts and figures are determining loud and clear that micro-finance is the vital solution for Poverty Alleviation.


Aim of micro financing is to provide financial services to those people who are generally gets ignored from traditional banking channels because of low income and they are not capable of paying heavy levying interest rates on loans and the paperwork involved in getting loan. It also helps households and entrepreneurs to do finance income generating activities to improve their lifestyle, to feed their family, to protect themselves from changing conditions i.e. illness, death, theft, natural disasters and to build assets so they can live above the poverty line with prosperity. Microfinance seeks to assist the poor and microfinance institutions seek to be the bankers of the poor. Microfinance is not only helping the poor’s but it is also generating new jobs, new business, increased income, better health and welfare and these are the things which are excelling the microfinance and its institutions in an environment. Microfinance borrowing is a relaxed and non-expensive way of getting finance and to secure the loan no complex paperwork, no bureaucratic procedures are being followed and no office or staff is involved.


Micro financing is best explained on the basis of poverty theory. Although micro-financing alone cannot eradicate the effect of poverty from the society but it has become one of the most popular poverty reducing strategies in the world. Through this we will analyze the effect that microfinance has on poverty reduction. Poverty alleviation is the vital concern of policy makers throughout the world. To lower the poverty level one must know the average earning of an individual living below the poverty line which will eventually help in reducing inequalities and giving same opportunities to weaker economic factors to progress and to achieve these goals financial sector policies are required. Policy planning for effective financial development, challenges the micro finance as in ground reality, access to finance by the poor, weaker sections is limited due to several reasons. To tackle this problem effectively, more research is needed to measure and track the impact of microfinance on poverty alleviation.

In 70’s it became noticeable that a large number of poor, especially women, were not getting benefit from anti-poverty tactics. The investments into community development and agriculture did not always reach those who are needy . In the 60’s and 70’s the informal sector and small farmers became noticeable in development . This is the time when Muhammad Yunus started to lend small amounts of money to the people of Jobra with the intention to solve an immediate problem Yunus initiated a program that ultimately became one of the most popular antipoverty strategies throughout the world. The UN proclaimed 2005 as the year of microcredit and several world conferences have referred to it as the frontrunner in poverty alleviation strategies (Barres, 2007). In 2006 public donations in microfinance programs was more than 1.5 billion US dollars. Private investments in the same year exceeded 500 million. Practitioners use these investments to achieve the best possible outcome in changing the lives of the poor and needy persons.

There are different methodologies of micro finance institutions (MFI’s) but all of them provide financial services to the poor . These services include microcredit but also saving schemes, money transfer systems, insurances and pensions. MFIs help the poor in setting up businesses, build up assets, consumption smoothing and risk management.

According to the Consultative Group to Assist the Poor (CGAP):“Financial services for poor people have proven to be a powerful instrument for reducing poverty, enabling them to build assets, increase incomes, and reduce their vulnerability to economic stress.”

Within the enormous amount of poor in the world, a distinction amongst them is necessary in order to address poverty reduction in the most efficient way . Since there are different indicators of poverty and measuring the deprivation of the poor (the dollar-a-day poverty line, the Human Poverty Index), there is not one definition for what constitutes deprivation. Poverty is caused by context-specific and core elements. Context-specific causes include a political, economic and sociocultural context which for instance translates to inequality Core causes are direct (nutrition deprivation) or indirect (poor access to food), but are almost always linked to consumption. With all these interlinking impacts on the life of a poor person, it makes unrealistic to think that providing loans can be the answer to poverty. When analyzing the complexity of this poverty web one can debate that only in a fairytale microfinance can address all these issues. The multi-dimensional character of poverty and the set of different indicators necessary, make it in addition incredibly hard to observe and measure poverty MFI’s have shown a struggle with assessments and although has initiated a proposition, a global agreement on measuring strategies of the impact of microfinance programs.

Stewart states four approaches to poverty. One of them is participatory approach in which empowerment of the poor is through groups and this approach fits those MFI’s who are working through group lending. Most programs have borrowers who choose their own group members and members have full responsibility for each other’s debts (Harper, 1998). When Yunus introduced lending to the poor, a movement of participation in rural development started. Participatory approach is still evolving in development; there are complications in mainstreaming it into policy. The participatory techniques tend to stick to the practical, project level and are hard to integrate into policy processes. Participatory methods for poverty reduction are also hard to measure and analyze . This practical character described by Stewart et al. and might complicate integration of microfinance programs within other development strategies and policies which seems necessary to handle the complexity of the poverty-web.

Employment is a main element while analyzing the actions of microfinance programs to help the poor. MFI’s also wanted to create opportunities for the poor ones to set up their own businesses by lending them credit. Since the poor largely based on employment , this is an important aspect in which microfinance helps into poverty alleviation. To rely simply on economic growth for decreasing unemployment rates in a country is unrealistic and even with higher employment rates it might not reach the poor or improve their conditions . In order to get people out of poverty a country needs more than economic growth, pro-poor growth is necessary .

Self-employment is indeed a good approach of microfinance for poverty alleviation but it is too slow for the developing countries. This theory is supported by the International Labor Organization (ILO) and UNDP research , illustrates that employment has an important role in achieving pro-poor growth. The core problem of pro-poor growth in not unemployment it is hectic work carried on low levels of productivity with little financial compensation for the labor.

Context of the study

According to the World Bank Report 1.1 billion people since 1990 got out of the extreme poverty due to micro-financing in which there is a broader range of products to meet the diverse demands of the market.As per Convergences Microfinance Barometer Statistics, the global microfinance landscape has been experiencing a slow-but-steady growth. (Impact of microfinance).In 2016, microfinance institutions reached 132 million low-income clients with a loan portfolio worth US$102 billion. The total number of borrowers in the global microfinance space is estimated to reach 151.2 million in 2018. (Impact of microfinance).In earlier study, 5% of the participants were able to escape poverty annually. In a subsequent study, the corresponding impact was an 8.5% reduction in moderate poverty and an 18% reduction in extreme poverty. Evidence was also found of positive spillovers on non-program participants in the villages. .“Asia is the most developed continent in the world in terms of volume of MFI (Microfinance Institution) activities.” This conclusion, drawn by Lapeneu and Zeller , is based on an analysis of over 1,500 institutions from 85 developing countries. Comparison of MFI’s in Asia with MFI’s in Pacific or Africa shows that Asia accounted for the majority of MFIs, retained the highest volume of savings and credit, and served more members than any other continent.

So it can be clearly seen from the theory that there is a significant impact of microfinance activities on the poverty alleviation as it is not only economically benefiting the individuals by improving the living standard but it also benefiting in social terms and overall the economy of the country is boosting and through which per capita income is increasing.

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