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Chapter 1
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An Overview of Microfinance
Christopher Gan*,§, Gilbert V. Nartea†,¶ and Judy Li Xia‡,||
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*Professor in Accounting and Finance,

Faculty of Agribusiness and Commerce,
Department of Financial and Business System,
PO Box 85084, Lincoln University, Christchurch, New Zealand
†
Associate Professor, Chairperson, Department of Finance,
Waikato Management School, University of Waikato,
Private Bag 3105, Hamilton 3240, New Zealand
‡
Lecturer, New Zealand College of Business,
15A Bishopdale Court,
Bishopdale 8053, Christchurch
§
Christopher.Gan@lincoln.ac.nz
¶
narteag@waikato.ac.nz
||
Judy.Li@lincolnuni.ac.nz

Abstract
Microfinance has been recognised and considered as the common
mechanism to provide credit for the poor and low-income people,
especially people in rural areas. Since its initiation in Bangladesh in
the seventies, it has been gradually embedded in national strategies of
many developing countries as well as universal goal to combat with
hunger and poverty in the new millennium. The chapter provides an

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2 Microfinance in Asia

overview of microfinance and microcredit. The chapter discusses who

are the microfinance providers, who do they serve and how do they help
the poor. The chapter also provides a summary of empirical evidence on
the impact of microfinance.
Keywords: Capital, credit accessibility, microfinance, poverty, rural
household.
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1.1 Introduction
Lack of ability to obtain credit from the formal financial sector has long
been viewed as the biggest obstacle to improving households’ livelihood
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(McCarty, 2001; Pham & Lensink, 2007). To fulfil credit demand, rural
households have to seek informal sources of credit at higher a interest rate
to support their production and consumption. This informal debt is
believed to marginalise household income and likely leads the borrower
into a cycle of debt and poverty. This market failure is eminent in many
developing countries where the rural financial market is not functioning
well (Musinguzi & Smith, 2000). Therefore, credit inaccessibility in rural
areas impedes the development of the rural sector, which potentially
decelerates the development of the rural economy. To increase credit
access for rural households, many governments have implemented micro-
finance programmes targeting agricultural and rural areas nationwide
particularly in developing countries. The policies aim to assist rural poor
households’ access to microfinance products through banks at a preferable
interest rate. In addition, the governments have recognised microfinance
products as a strategic tool to provide cheap credit to rural households.
Microfinance refers to the provision of financial services to the poor
and low-income households (ADB, 2000). These services can include
credit, savings, insurance, money transfers and equity investments. The
feature that most distinguishes these services from those given by tradi-
tional financial institutions (FIs) is the small size of the transactions. Hence,
microfinance institutions (MFIs) provide mainly microcredit, microsavings
and microinsurance. New innovations in microfinance include microtrans-
fers and microequity.
Microcredit involves lending capital in small amounts to poor people
who are traditionally considered unbankable to enable them to invest in

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An Overview of Microfinance 3

self-employment (Kasim & Jayasooria, 2001). The World Bank (2006,

p. 12) describes microcredit as “a process in which poor families borrow
large amounts (or lump sums) of money at one time and repay the amount
in a stream of small, manageable payments over a realistic time period
using social collateral in the short run and institutional credit history in the
long run”. Different forms of microcredit are available such as individual
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lending, group lending and village banking. Particularly, microcredit pro-

grammes have been developed to provide rural households with greater
credit accessibility.
Microsavings are small amounts of money saved by poor people
with FIs, mostly MFIs. Some schemes involve a daily collection system
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and service delivery at the doorstep of clients. As these small savings

accumulate they provide a source of lump sum cash for future emergen-
cies, investments and consumption needs of the poor (Mersland &
Eggen, 2007).
In some cases, microcredit programmes would involve saving ser-
vices, but the services are limited to the collection of compulsory
deposit amounts from the borrowers to collateralise the loans issued.
Borrowers cannot access these compulsory deposits and cannot have
voluntary saving accounts in microcredit programmes (World Bank,
2006; Cornford, 2000).
Though microcredit has taken a more prominent role in microfinance,
it appears that the poorest of the poor find the provision of savings oppor-
tunities more important than the provision of credit facilities (Collins
et al., 2010). There is empirical evidence suggesting that in some regions
of the world the poor use savings products more than credit. For example,
Maes & Reed (2012) report that The Opportunity International Bank of
Malawi has 45,000 borrowers and 250,000 savers, the Equity Bank in
Kenya has 715,000 borrowers and 4 million depositors and the Grameen
Bank (GB) has over US$1.4 billion in deposits, which is 145% of its out-
standing loan portfolio of US$965 million. Khan & Ashta (2012) also
report that 28 Bangladeshi MFI’s collectively have 27.8 million depositors
compared with about 20.6 million borrowers with 26 out of the 28 MFIs
reporting more depositors than borrowers.
Microinsurance is a programme which provides insurance services to
the poor and low-income populations and small businesses. It operates

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4 Microfinance in Asia

similarly to regular insurance except for the fact that regular premium
payments and therefore the payouts are also smaller. Just like regular
insurance common types of risks covered are life, health, disability and
property including agricultural production. Microinsurance could be
directly provided by traditional insurance companies but could also be
delivered by MFIs. Some MFIs also provide loans to cover the payment
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of microinsurance premiums like CARD in the Philippines (Reinsch &

Metcalf, 2010).
Microtransfers are a new innovation wherein small amounts of money
or remittances sent by migrants and overseas workers back to their home
countries. Another new innovation is microequity, which refers to the
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provision of equity instead of credit to finance projects of the poor. It is so

far only in its early stages of development and is being done mainly in
developed countries.

1.2 Who Does Microfinance Serve?

Microfinance caters to the financial needs of underprivileged groups
including female heads of households, pensioners, displaced persons,
retrenched workers, small farmers and microentrepreneurs (CGAP,1
2003). In addition, microfinance borrowers are typically self-employed,
household-based entrepreneurs who have relatively unstable income
sources and can be divided into two groups: rural and urban. In rural areas,
the borrowers are usually small farmers and others who are engaged in
small income-generating activities such as food processing and petty
trade; while in urban areas, microfinance activities are more diverse and
borrowers include shopkeepers, service providers, artisans, street vendors
and small–medium enterprises (Sapovadia, 2006). However, the client-
focus of microfinance varies in different regions. For example, in Latin
America, microfinance has been developed into a business rather than an
anti-poverty programme, which is a branch of commercial banking and
focuses more on urban small–medium enterprises than the rural poor

1
CGAP refers to the Consultative Group to Assist the Poor, which is a consortium of 33
public and private development agencies working together to expand access to financial
services for the poor in developing countries.

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An Overview of Microfinance 5

(Poyo & Young, 1999). By contrast, in Asia where the poor population is
more numerous, especially in rural areas, microfinance would inevitably
be directed to serve the rural poor as an anti-poverty instrument (World
Bank, 2006).
The most common financial service provided by MFIs is microcredit,
hence microfinance and microcredit are commonly used interchangeably,
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but microfinance is obviously much broader than just microcredit. In the

next section, we will describe the basic characteristics of microcredit.

1.3 Characteristics of Microcredit

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Compared to traditional lending, microcredit has its own vivid characteris-

tics. Loans from the microcredit programmes are usually in small amounts
and have relatively shorter repayment recycles. Du (2004) argues that a
major difference between microcredit and conventional lending is that the
former targets borrowers from the poor and low-income groups. In addi-
tion, microcredit emphasises lending to the poor women who are dispro-
portionately represented among the world’s poorest people. Another
outstanding difference between microcredit and traditional lending is that
microcredit is usually offered without the requirement of collateral com-
pared to compulsory collateral requirement in traditional lending (Yunus,
2003). However, in place of collateral, microcredit disciplines borrowers
through a special strategy such as group lending, which represents another
characteristic of microcredit: mutual accountability. Borrowers form into
groups to monitor each other. The potential pressure on the groups helps to
keep individual repayment records transparent and the collective responsi-
bility works as ‘social collateral’ on the loans (Hussain, Maskooki &
Gunasekaran, 2001). We discuss these differences more fully below.

1.3.1 Targeting the poor

A major difference between microcredit and conventional lending is that
the former often targets borrowers from the poor and low-income groups.
Microcredit programmes are poverty-focused, which aim to facilitate the
access to financial services such as credit for the poor globally who are
usually regarded as disadvantaged groups in accessing conventional

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financial services from formal FIs. In addition, microcredit emphasises

lending to poor women who are disproportionately represented among the
world’s poorest people. According to Cheston & Kuhn (2002), about 74%
of microcredit borrowers in the world are women. The rationale behind
lending to women is that most women borrowers have been proven to be
more credit-worthy than men, in addition to the better ability of controlling
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the use of loans by women (Garikipati, 2006; Ang, 2004).

1.3.2 Collateral free

Collateral is always a compulsory requirement in traditional lending as a
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way of minimising default risk anticipated by lenders. Such collateral

requirement becomes more rigid if borrowers are economically poor.
However, the poor usually do not own valuable assets which can be used
as appropriate collateral when applying for loans from traditional FIs, and
as a result, poor people are historically considered unbankable and pre-
cluded from the traditional credit markets. Microcredit is an innovative
idea that challenges the traditional lending wisdom of ‘no collateral means
no credit’. It deems the poor as creditworthy as the rich and provides
­collateral free loans to the poor to develop entrepreneurial activities.

1.3.3 Group-lending scheme

In place of collateral, however, microcredit disciplines borrowers
through a special scheme such as group lending. Loans are made to an
individual borrower who is a member of a borrowing group. However,
each individual borrower assumes responsibility for the loan repayment
of his or her group members, which means all group members are jointly
liable. If only one member from a group defaults, the rest in the group
will be denied future access to loans from the microcredit programme.
As a result, the principle of joint liability creates an incentive mecha-
nism by which individual borrowers are stimulated to select credible
members to group with, to monitor the other members’ activities once
the loan is received and to enforce repayment in case a group member
fails to fulfil his or her obligation. In other words, the group-lending
scheme creates a special kind of collateral called ‘social collateral’ on

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An Overview of Microfinance 7

the loans, which reduces the costs of screening and monitoring borrowers,
and ensures timely repayments for lenders (Anderson & Nina, 2000;
Besley & Coate, 1995).

1.4 Who are the Microcredit Providers?

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A variety of organisations have been involved in the delivery of ­microcredit

services during the last two decades. The World Bank (2006) categorises
these organisations into seven types which include commercial banks,
wholesale development banks/funds, retail development banks/compa-
nies, apex organisations funded by multilateral or bilateral donors and/or
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governments, MFIs and non-profit non-governmental organisations

(NGOs), cooperatives and community-based organisations. Institutions
such as wholesale development banks/funds and apex organisations pro-
vide lending only to institutions such as MFIs and cooperatives, instead of
individuals; by contrast, cooperatives and community-based organisations
only lend to individuals.
Different countries have fostered their own local organisations to pro-
vide microcredit and such local organisations can be generally classified
as NGOs and formal FIs. For example, the Bangladesh Rural Advancement
Committee (BRAC) and the Association for Social Advancement (ASA)
are two major NGOs, while the GB is the biggest FI providing m ­ icrocredit
in Bangladesh. These three major microcredit providers serve around
11 million borrowers throughout Bangladesh (ADB, 2000). Similarly,
Amanah Ikhtiar Malaysia (AIM) is the largest NGO in Malaysia provid-
ing microcredit to about 50,000 borrowers for a total loan amount of
RM200 million (Kasim & Jayasooria, 2001). In addition, the Unit Desa of
Bank Rakyat Indonesia (BRI-UD) in Indonesia is a successful rural FI
which has attracted more than 2.5 million borrowers with total outstand-
ing loan of US$781 million (World Bank, 2006; Timberg, 1999).
Among the most successful microcredit programmes is the GB
­microcredit, introduced by Muhammad Yunus in the late 1970s. As a
­pioneer in microcredit, the GB promotes innovative ideas in poverty
reduction through its lending programmes. Yunus (2003) advocates that
credit should be promoted as a human right and should be based on ‘trust’
rather than collaterals or legally enforceable contracts. Furthermore,

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Yunus stresses that in order to eliminate poverty, appropriate changes

must be made in the institutions and policies surrounding the poor, rather
than just providing charity to the poor. Based on this belief, the GB cre-
ated an accessible mechanism for the poor to access credit on reasonable
terms to improve their welfare (Yunus, 2003; Latifee, 2003). The Grameen
model has been implemented in more than 50 countries in Asia, USA,
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Australia and Europe (Hussain et al., 2001). Today, the GB has a network
of nearly 1,300 branch offices that serve 3.8 million borrowers of which
96% are women, and has disbursed loans worth US$4.5 billion (Chowdhury,
2004). More significantly, 5% of GB’s borrowers graduate from poverty
each year and sustain their living standard (Hussain et al., 2001).
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1.5 How Does Microfinance Help the Poor?

It is often argued that financial services such as credit, savings and insur-
ance can positively affect the livelihood of the poor thereby improving
income distribution (Latifee, 2003; Claessens, 2006). According to Latiffe
(2003, p. 2), “credit is a powerful instrument to fight poverty” because “it
creates opportunities for self-employment rather than waiting for employ-
ment to be created”. Credit gives poor people a means of investing and
breaking out of the “vicious circle” of poverty because credit has the
potential of improving credit users’ income and savings, and consequently,
enhancing investment and reinforcing high incomes (Mohamed, 2003).
Despite the importance of financial services such as credit in helping
the poor to improve their living conditions, poor people are excluded from
the formal financial system and such exclusion ranges from partial exclu-
sion in developed countries to full or nearly full exclusion in less devel-
oped countries (LDCs) (Brau & Woller, 2004). Traditional FIs are
reluctant to serve the poor mainly because poor people fail to meet the
selection criteria such as the requirement of physical collateral set by FIs.
The perceived high risks and costs arising from processing and servicing
unsecured small loans make FIs shy away from financing the poor, mainly
due to the concern of financial viability. Lacking access to formal credit,
most poor and low-income people continue to rely on meagre self-finance
or informal credit, which limit their ability to actively participate in and
benefit from the development process.

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The primary goal of a microcredit programme is to provide credit to

the poor by extending small collateral free loans that purposely enable the
borrowers to actively generate a range of improvements in economic con-
ditions (World Bank, 2010). Islam (2007) hypothesised that microcredit
can create a circle of growth for poor borrowers that ‘low income house-
holds need credit for investment to create more income and more credit
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and more income’. In other words, microcredit enhances income growth,

which increases a household’s consumption level, hence, contributes to an
immediate welfare improvement. For example, an enhanced income from
borrowing encourages the poor to increase investment in working capital
as well as physical assets. Capital and physical asset accumulation attrib-
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uted to microcredit reinforces the income generating capabilities of bor-

rowers (Aghion & Morduch, 2005; Hossain & Diaz, 1997).
Hulme (2000) argues further that conventional microcredit pro-
grammes lead to changes in household income, which leads to changes in
economic security, educational and working skill levels. Ultimately, these
changes lead to modification in household welfare and social political
relations and structures. Morduch & Haley (2001) opine that microfinance
helps reduce the impact of economic shocks on the poor and increase their
assets and income.
Proponents of microfinance also argue that improved access to credit
at reasonable cost could enable the poor to smooth consumption (food and
non-food), better cope with crises, develop self-employed businesses,
enhance income earning capacity and build up assets gradually. Moreover,
Swain (2004) stresses that since microfinance programmes have generally
targeted women as clients, access to financial services such as credit can
empower women to become more confident, more assertive, more likely
to participate in family and community decision making and better able to
confront systemic gender inequities. Therefore, microfinance is a mecha-
nism which gives the poor, especially women to better their livelihoods
(Mourji, 2000).
Littlefield & Rosenberg (2004) argue that though microfinance is not
a panacea for poverty, the poor value it highly because it can enable them
to create employment opportunities that might induce improvements in a
range of welfare measures, including income stability and growth, school
attendance, nutrition and health.

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10 Microfinance in Asia

Latifee (2003) noted that microcredit improves the poor’s economic

conditions by enabling them to start self-employed businesses, increasing
their income, stabilising their consumption and building up their capital
assets. The poor can use the generated income to pay for the instalment of
loans while leaving their original capital intact. Consequently, their capital
base usually increases in large amounts as they borrow continuously,
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which gives them opportunities to make medium and long-term invest-

ments. Therefore, microcredit borrowers are likely to sustain long-term
development by participating in entrepreneurial activities and as a result,
shake off poverty with economic growth.
In the case of agriculture, credit is an important element in the agri-
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cultural production process, which allows producers to satisfy the capital

needs of the production cycle.
The provision of microinsurance facilities to MFI clients allows cli-
ents better capacity to withstand the consequence of many shocks and
paves the way for better risk management. Since the poor are less able to
cope with shocks they are less likely to take up higher yielding, albeit
more risky, enterprises which might reduce poverty (Churchill, 2007). But
if a farmer has crop insurance for example, he might be more inclined to
take up more capital intensive cropping systems that could produce higher
incomes. In addition, microinsurance also allows the poor to make full use
of their loans for productive enterprises rather than having to use them to
pay for unforeseen medical or funeral expenses, or having to set aside a
portion of their loan as a cushion for unforeseen shocks.
Microtransfer services of overseas remittances also have important
benefits to people of developing countries. Overseas remittances are unde-
niably a major source of external development finance (Hasan, 2006). The
World Bank (2006) reports that out of a total of US$232 billion in remit-
tances worldwide, developing countries received US$167 billion which
was more than double the total development aid from all sources.
De Bruyn & Kuddus (2005) report that up to 60–70% of recipient poor
households’ total income come from remittances. Remittances facilitate
investment in both productive and consumption goods in recipient coun-
tries (Yang, 2006). Rivera & Reyes (2011) also note that while much of
the remittances are used for consumption, the residual are converted into
savings that could be used for investment purposes.

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1.5.1 Empirical evidence

The empirical evidence on the impact of microfinance is at best mixed.
While microfinance, particularly microcredit significantly contributes to
alleviating poverty, it is not a panacea for poverty reduction. In a review
of empirical studies investigating the effectiveness of microcredit in pov-
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erty reduction, Weiss & Montgomery (2004) conclude that the evidence is
far from conclusive. More recently, Duvendack et al. (2011) reached the
same conclusion.
First, we will review empirical studies suggesting a positive impact of
microfinance on the poor, especially women and low-income households
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followed by a review of studies pointing to the contrary.

1.5.1.1 Poverty alleviation

There is rich evidence showing that microcredit has a significant impact
on poverty reduction around the world. Pitt & Khandker (1998) report
that microcredit increases consumption expenditure, reduces poverty,
and increases non-land assets. Zaman (1999), focusing on the BRAC,
one of the largest microcredit providers in Bangladesh, also reports that
microcredit can help the poor smooth consumption and build assets.
More recently, studies show that 48% of the poorest households in
Bangladesh have risen above the poverty line with access to microcredit;
similarly, BRI in Indonesia has witnessed an increase in its microcredit
borrowers’ income by 12.9% compared to only 3% increase in non-
borrowers’ income (World Bank, 2006; CGAP, 2003). Similarly, Kasim
(2000) conducted a study on AIM’s microcredit programmes in Malaysia
and found that the changes in income, expenditure, savings and assets
are positive and higher for the microcredit borrowers compared to non-
borrowers. In 2002, China Rural Credit Cooperatives (RCCs) launched
the microcredit programmes on a national scale becoming the main force
in popularising and formalising China’s microcredit programmes with
their extensive network penetrating the grassroots level (Du, 2004, 2005;
Sun, 2003). The amount of microcredit loans issued to rural households
by RCCs nationwide totalled 96.7 billion yuan in 2002 and around 60
million rural households had received microcredit loans provided by
RCCs. The scale of RCCs’ microcredit programme has far surpassed the

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12 Microfinance in Asia

scales of both the NGO and government programmes (Gao & Hu, 2005;
Du, 2004; Druschel, 2002).
Islam’s study (2007) shows microcredit contributes greatly to borrowers’
productivity, which is a crucial determinant of the economic condition of
the rural poor. For example, financial support from microcredit allows the
poor to invest in high-yielding varieties and advanced technology, which
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significantly stimulates productivity and promotes production. According

to Islam, increased productivity is important for a ‘concomitant’ and
‘secular’ rise in income, which is crucial for rural poverty reduction.
Furthermore, microcredit also creates employment opportunities for a vast
under-utilised labour resource by undertaking economic activities on a
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self-employed basis. As the self-businesses expand over time, more labour

is demanded.

1.5.1.2 Coping with risk and shocks

Latifee (2003) observed that microcredit borrowers are in better position
to cope with different crises. For example, during the 1998 flood in
Bangladesh, the microcredit borrowers could borrow more and repay the
loans within an extended period of time so that they could maintain their
daily expenses and productive investment during the crisis. Therefore,
microcredit can minimise the severity of such crisis and help borrowers to
recover from their losses (Latifee, 2003; Zaman, 1999).
In addition to maintaining consumption of basic necessities, access to
credit can increase poor farmers’ risk-bearing ability and help them alter
their risk-coping strategies so that farmers may be willing to adopt new
and riskier strategies with higher potential return in their production
instead of risk-reducing but inefficient strategies (Diagne, Zeller &
Sharma, 2000). Hence, credit is a powerful instrument to help poor people
invest and break out of a ‘vicious cycle’ of poverty because it has the
potential to improve the users’ incomes and savings, and consequently,
enhance investment and reinforce high incomes (Mohamed, 2003).

1.5.1.3 Social status promotion/gender equality/women empowerment

By joining the microcredit programmes, the poor are organised into
groups where they can share diverse information to learn more about the

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An Overview of Microfinance 13

outside world. As a result, the poor, women in particular, become more

mobile and active in participating in social network and commercialisa-
tion process, and become more conscious about their life quality and their
family welfare. Latifee (2003) concludes that the poor can benefit from
microcredit through economic condition improvement and social status
promotion.
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Maclsaac (1997) acknowledges that microcredit is a powerful tool in

fighting poverty and promoting gender equality. The author argues that
microcredit can promote gender equality by creating employment oppor-
tunities for poor women to generate stable income. Such economic
empowerment provides women with new skills, information and organi-
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sational capacity, which indirectly results in social and political empower-

ment. Similarly, Manimekalai (2004) asserts that microcredit plays a
major role in many countries’ gender and development strategies because
of its direct relationship to women empowerment. This view is shared by
Cheston & Kuhn (2002), who note that the impact of microcredit on
women empowerment can be manifested by increased participation in
decision making, more equitable status of women in the family and com-
munity, increased political power and rights, and increased self-esteem.
More specifically, Manimekalai (2004) studied women borrowers from
Self-Help Groups2 (SHGs) in India and finds that SHGs microcredit pro-
gramme in India has greatly helped women borrowers improve their eco-
nomic conditions and promote their social status.
Since microcredit programmes have generally targeted poor women
as clients, access to microcredit can empower poor women by increasing
their contribution to household income and asset building, which is a
­significant contributor toward their increased self-worth and improved
family status. As a consequence of participating in microcredit ­programmes,
women borrowers become more financially independent, more likely to
participate in social networks and commercialisation processes, and able
to better confront systemic gender inequities. A regional study by World
Bank (2006) reveals that 90% of women borrowers from SHGs in India

2
SHG is the dominant microfinance scheme in India. The operations of SHGs composed
of 15–20 members are based on the principle of revolving the members’ own savings. The
volume of individual borrowing is determined by the volume of member’s savings or the
savings of the group (World Bank, 2006).

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14 Microfinance in Asia

can freely visit local markets and make small and large purchases
independently, while 68% of women borrowers in Nepal can make inde-
pendent decisions on property, children’s education and marriage.
Other recent studies also attest to the impact of microfinance on
women empowerment (see for example, Pitt, Khandker & Cartwright,
2006; Ashraf Karlan & Yin, 2010) due in large part to increased female
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income derived from microenterprises. This empowerment is also seen to

result in changed family consumption pattern since women are more
inclined to spend on children and family goods (Duflo & Udry, 2003).
Microfinance in Asia Downloaded from www.worldscientific.com

1.5.2 Counter findings/criticisms against microfinance

1.5.2.1 Poverty alleviation
According to Maclsaac (1997), microcredit may be less effective, or even
counter-productive, in helping the poorest of the poor to raise their living
standards because the worse-off borrowers use the loans only for con-
sumption or invest in less riskier (and generally less remunerative) activi-
ties compared to the better-off borrowers who tend to invest in riskier and
more productive ventures including technological improvements, which
provides opportunities of generating greater income to improve their liv-
ing standards. In the same vein Bateman & Chang (2009) more recently,
argue that microfinance works against technology adoption by creating an
environment that helps perpetuate primitive technology. Maclsaac (1997)
suggests that microcredit can be more effective when combined with other
financial interventions such as savings and insurance. Chowdhury (2004)
echoes this more recently, arguing that microcredit should not be viewed
as a sole instrument for poverty reduction; instead, it should be included
as a part of broader poverty eradication strategy combined with other
intervention programmes such as social protection programmes. As an
answer to this criticism, MFIs have innovated new services such as
­microsavings, microinsurance, microtransfers and microequity. However,
Quibria (2012) notes that unless two fundamental constraints are
addressed, it would be difficult for poor households to graduate from pov-
erty. The first is the problem of the predominance of primitive or low
technologies in rural microenterprises and the second is the challenge of
weak domestic demand for their products.

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An Overview of Microfinance 15

Early studies suggesting positive impact of microcredit on poverty

reduction such as that by Pitt & Khandker (1998) are now being chal-
lenged. In a follow-up to his earlier study Khandker (2005) finds a much
weaker impact of microcredit on poverty. Khandker finds that though
microcredit raises consumption and non-land assets of the very poor, it
has little effect on aggregate poverty. In addition, Banerjee et al. (2009),
by 27.63.209.240 on 10/18/23. Re-use and distribution is strictly not permitted, except for Open Access articles.

using randomised control trials which overcome the technical economet-

ric problems of earlier studies, also do not find any robust evidence of a
positive impact of microcredit on poverty in the slums in urban Hyderabad,
India. Likewise Karlan & Zinman (2010) did not find a positive relation
between microcredit and poverty for microentrepreneurs in Manila,
Microfinance in Asia Downloaded from www.worldscientific.com

Philippines.

1.5.2.2 Women empowerment

Though some authors opine that microcredit leads to women empower-
ment, Quibria (2012) argues that this is not automatic, since female
empowerment is contingent on the effect of microcredit on female
income. Quibria argues further that if female income from credit falls
short of male income, the female might still be marginalised in household
decision making. Indeed a number of studies argue that microcredit has
had little or no effect on female empowerment (see for example, Goetz &
Gupta, 1996; Hunt & Kasynathan, 2001; Banerjee et al., 2009).
Furthermore, though Belwal, Tamiru & Singh (2012) find that microcredit
can increase income and savings of female entrepreneurs, this did not
have any salutary impact on their lives after accounting for loan repay-
ment and interest.

1.5.2.3 Mission drift

Another criticism levelled against microfinance is mission drift
(Mersland & Strom, 2010). Ashta et al. (2014) points out that the mission
drift critiques usually centre on (a) diversion of microcredit into consumer
credit, (b) larger loan sizes and (c) high interest rates. Firstly, critics of
microcredit suggest that these funds are increasingly being used by
borrowers for consumption rather than for entrepreneurial activities.
­

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16 Microfinance in Asia

The second critique on larger loan sizes means that the loans are being
targeted for the wealthier of the poor rather than the poorest of the poor
(Ashta, Couchoro & Musa, 2014). Copestake, Bhalotra & Johnson (2001)
found this to be true for PULSE in Zambia. Roth (1997) also pointed out
earlier that microcredit has not reached “the poorest of the poor” but “the
wealthier of the poor”, and it is limited by poor political institutional
by 27.63.209.240 on 10/18/23. Re-use and distribution is strictly not permitted, except for Open Access articles.

framework in some countries. For example, Reeve (2006) suggests that

incoherent legal framework and poorly trained management contribute to
the inefficient implementation of microcredit in Indonesia. Finally, some
critics also point out that a number of MFIs are so focused on profit moti-
vation leading them to charge high interest rates which in turn leads the
Microfinance in Asia Downloaded from www.worldscientific.com

poor borrowers feeling deceived (Eversole, 2003). Examples include the

case of MFI Compartamos which reportedly was charging interest rates as
high as 99% per year (Ashta & Bush, 2009; Ashta & Hudon, 2012; Lewis,
2008; Smith & Epstein, 2007), and the case of SKS in India with allega-
tions that its microcredit programmes led to too much borrower stress and
even suicides (Ashta, Khan & Otto, 2011). Cheston & Kuhn (2002) also
argue that women who borrow from MFIs suffer ill health and exhaustion
because of overwork, caused by compulsory participation in the time-
consuming meetings, engaging in income-generating activities to pay off
the loans, and simultaneously, taking traditional responsibilities of the
family, such as looking after children. In addition, microcredit remains
inaccessible to the poorest of the poor because microcredit institutions
intend to protect their self-sustainability to achieve larger scale of poverty
reduction at moderate level (Druschel, 2002).
Despite these criticisms the World Bank (2006) argues that the overall
impact of microfinance is positive but the degree of impact varies in
­different countries.

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