Stephen Mago / Journal of Asian Finance, Economics and Business Vol. 1 No.

2 (2014) 5-13 5

Print ISSN: 2288-4637 / Online ISSN 2288-4645

doi: 10.13106/jafeb.2014.vol1.no2.5.

Microfinance and Poverty Alleviation: An Empirical Reflection

1)

Stephen Mago*

[Received: February 20, 2014 Revised: April 15, 2014 Accepted: April 30, 2014]

er concept-an expanded version of microcredit. It involves giving

Abstract small loans and other follow-up services such as social inter-
mediation, enterprise development services, insurance(micro-in-
surance), savings facilities, housing microfinance, green micro-
The purpose of this paper is to carry out an empirical analy-
finance, money transfers and social services (Ledgerwood, 1999;
sis of the link that exists between microfinance and poverty
Asian Development Bank, 2000).
alleviation. The analysis is driven by literature searches on em-
Microfinance programs have received acceptance as poverty
pirical works done by different researchers in different contexts.
alleviation strategies in many countries (Barnes et al., 2001;
Qualitative research methodology was adopted, following a desk-
Ahmed, 2010; Zhan & Wong, 2014). For example in Bangladesh
top approach. An empirical literature review took a centre stage
(Amendariz de Aghion & Morduch, 2005; Zeller & Meyer, 2002;
in this investigation. An analysis of empirical works shows that
Pitt & Khanker, 1996; Yunus, 1998, 2003, 2004), Bolivia,
microfinance enhances poverty alleviation despite the challenges
Philippines (Kondo et al, 2008), India (Mayoux, 2000), Kenya
such as the Indian Andhra Pradesh crisis. The paper is limited
(Kenya Rural Enterprise Program Development Agency, 2013),
to a review of empirical sources of literature. A field survey,
Malawi (Diagne & Zeller, 200) and Mozambique (Chidzero et al.,
supported by an econometric analysis would have helped to
1998). However, the vital question regarding the impact of mi-
generate robust results. This paper attempts to bring together
crofinance on the general household welfare remains. This gave
the empirical works that were done in different contexts to shed
an impetus for empirical studies carried out in different countries
light on the important relationship between microfinance and
to investigate the impact of microfinance as a poverty alleviation
poverty. Many research works on microfinance depend upon
tool. This paper therefore aims to consolidate the selected em-
personal anecdotes, thus this present paper attempts to compile
pirical studies thus establishing the impact of microfinance on
the scattered empirical findings on microfinance and poverty
poverty.
alleviation.

Keywords: Microfinance, Poverty, Poverty Alleviation, Empirical

Review, Zimbabwe
2. Microfinance and Poverty Alleviation

JEL Classifications: E21, G21, P132 Microfinance intervention has been received with enthusiasm
by governments, foundations, community development groups,
non-governmental organizations and even for-profit private firms
(Carr & Zhong, 2002). Thus, it has been replicated (from the
1. Introduction
Grameen Bank model) in countries such as the United States
hence disproving the notion that developed countries cannot
Microfinance is increasingly gaining currency as a poverty al-
learn from the developing ones, where the movement was
leviation intervention. This article looks at the existing empirical
started. Developed countries such as the US realized the poten-
evidence that relates microfinance to poverty alleviation. The
tial embedded in the provision of microfinance to the poor (Carr
notion of microfinance evolved from microcredit. Microcredit re-
& Zhong, 2002). According to Carr and Zhong (2002), the de-
fers to the provision of small loans to the poor for consumption
veloped country (i.e., USA) also learnt from a developing coun-
and to start small-scale business activities. It follows an ap-
try (i.e., Bangladesh) about microfinance. Magner (2007) ob-
proach of giving ‘credit only’ to the poor, what Ledgerwood
serves that from previous studies and research, it is clear that
(1999) terms the ‘minimalist approach’ to the provision of fi-
microfinance is importantly a catalyst for the alleviation of
nance to the poor. On the other hand, microfinance is a broad-
poverty.
This section discusses the impact of microfinance on varia-
* Accounting and Information Systems Department, Faculty of bles such as income, consumption, savings, assets, employ-
Commerce, Great Zimbabwe University [P.O. Box 1235, Masvingo,
ment, diversification of economic activities and local trade. The
Zimbabwe Tel: (+263 77) 960-5587 e-mail: stepmago@gmail.com]
6 Stephen Mago / Journal of Asian Finance, Economics and Business Vol. 1 No.2 (2014) 5-13

impact analysis from literature shall be based on the summar- y Increase investments
ized microfinance poverty reduction nexus (see Table 1 below) Payments/m
y Greater income
that was developed by the Asian Development Bank (2000). oney y Facilitate trade and
y Higher
transfer investments
Studies which were devoted to microfinance impact include Pitt consumption
services
and Khandker (1996, 1998), McKernan (1996), Zeller, Diagne
and Mataya (1998), Mcnelly and Dunford (1998), Diagne and Source: Asian Development Bank (2000, p. 3)

Zeller (2001), Zeller et al. (2001) and Kondo et al. (2008).

These impact studies have contributed immensely towards em- 2.1. Impact of Microfinance on Income and Consumption
pirically explaining the impact of microfinance on poverty.
Income and consumption (expenditure) are economic and
<Table 1> Microfinance and Poverty Reduction quantitative impact evaluation indicators. A positive impact is ex-
Financial pected to bring an increase in income and expenditure among
Results Impact on poverty the poor. Microfinance programs help the poor to establish reli-
service
y More financial savings able and regular sources of income (Daley-Harris, 2002; Ahmed,
y Income from savings 2010; Zhan & Wong, 2014). Thus impact is realized in terms of
y Greater capacity for ability to access food, healthcare, education, consumption
y Reduce
self-investments
household smoothing, assets accumulation and so on. Figure 1 below
y Capacity to invest in better
vulnerability to summarizes how access to finance has a positive influence on
technology
risks/external food security.
y Enable consumption
shocks
smoothening Access to finance by rural farmers enables them to acquire
Savings y Less volatility in
y Enhance ability to face credit and accumulate savings. Savings accumulation increases
facilities of household
external shocks
microfinance consumption the production income of farmers in their on-farm and off-farm
y Reduce need to borrow
institutions y Greater income activities1). Such operations are central to the sustainability of
from money lenders at high
(MFIs) y Severity of income generating activities. This has an impact on improving
interest rates
poverty is
y Enable purchase of the disposable income for consumption and investment hence
reduced
productive assets encouraging local economic development.
y Empowerment
y Reduce distress selling of
y Reduce social In Ghana, Mcnelly and Dunford (1998) carried out a study
assets
exclusion and established that the increase in net non-farm income for
y Improve allocation of
resources participating women was twice as high as that of
y Increase economic growth nonparticipants. This displays the importance of microfinance in
y Enable taking advantage of non-farm business activities. Non-farm activities are also very
profitable investment y Higher income important in poverty alleviation because of their consumption
opportunities y More diversified
smoothening mechanism. Rural agriculture is highly vulnerable to
y Lead to adoption of better income sources
technology y Less volatile the bad environmental conditions such as floods, droughts,
y Enable expansion of income storms, cyclones, diseases and hail stone (Ellis, 2000; Zeller &
microenterprises y Less volatility in Sharma, 2002). These cause serious gaps in agricultural pro-
y Diversification of economic household duction hence the need for non-farm activities that help to close
activities consumption
the gaps. Seasonal gaps also cause poverty in areas where
y Enable consumption y Increase
Credit people depend solely on agriculture. These people need finan-
smoothening household
facilities
y Promote risk taking consumption cial support in form of microfinance so as to establish enter-
y Reduce reliance on y Better education prises and close seasonal gaps. Overreliance on agriculture
expensive informal sources for children
causes stresses as people fail to cope with the shocks that are
y Enhance ability to face y Severity of
external shocks poverty is
created by seasonal production gaps or those gaps created by
y Improve profitability of reduced environmental factors.
investments y Empowerment Another study by Zeller and Meyer (2002) in Bangladesh in-
y Reduce distress selling of y Reduce social dicated a positive impact of loans on household expenditure.
assets exclusion
Monthly total expenditure by participating households increased.
y Increase economic growth
The expenditures of program clients were found to be increas
y More savings in financial
assets
y Greater income
y Reduce risks and potential 1) Off-farm or non-farm activities refer to other income generating
y Less volatility in
Insurance losses activities that are not farm oriented such as small businesses and
consumption
services y Reduce distress selling of small production activities (welding, carpentry, sewing, handicraft
y Greater security
assets
etc). These have an effect of smoothing the consumption pattern
y Reduce impact of external
that is vulnerable to seasonal variations that affect agricultural
shocks
output.
 Stephen Mago / Journal of Asian Finance, Economics and Business Vol. 1 No.2 (2014) 5-13 7

Source: Zeller and Sharma (2002, p.23)

<Figure 1> How does Access to Finance Influence Household Food Security?

ing as compared to those of non-clients. This gives a picture of usurious private moneylenders hence reducing the severity of
that participation in microfinance programs benefits poor people social exclusion and poverty. Poor people also benefit from in-
and improves their expenditure patterns. surance, housing and health facilities that are brought about by
In the Philippines, Kondo et al. (2008) carried out a micro- microfinance programs that promote savings and investments. A
finance impact study. The study employed a quasi-experimental case in point is Grameen Bank of Bangladesh that provides a
pipeline design. This was meant to control non-random program range of services to the poor.
participation and fixed-effects estimation. Non-random attri- In Bangladesh, access to financial services led to the in-
tion/dropout problems were corrected by including former clients novative use of technology by poor women. These women sup-
in the survey. The study discovered positive but marginally sig- ported by the Grameen Bank were known as the “telephone la-
nificant impact on income per capita. They established the same dies”. The program called the Grameen Telecom, promoted link-
to be true with regards to total expenditure per capita. ages to the markets by these poor women. Illiterate women
Contrariwise, they established regressive (negative) impacts for (who are Grameen Bank members) were given small loans for
poorer households (those in the absolute poverty category) but purchasing and operating cellular phones. They would charge a
for richer households, they established positive influences. This small fee to villagers for communicating with relatives, friends
scenario was explained by the targeting approaches of micro- and buyers. Narayan (2002) states that, empirical studies estab-
finance programs in the Philippines, in which there are richer lished that 50% of the calls were made for social and economic
households. Microfinance impacts were also realized on sav- reasons. The villagers found it easy to check out current market
ings and investments. prices, consulting doctors and contacting relatives and friends.
A further analysis by Narayan (2002) estimated that the pro-
2.2. Impact of Microfinance on Savings and Investments gram generated real pecuniary savings of between $2.70 and
$10.00 due to reduced travelling expenses. Before the program,
Access to financial services by the poor people capacitates villagers used to travel between villages and Dhaka (the capital
them to mobilise savings. Their savings consequently improve of Bangladesh). According to Yunus (1998), Grameen telephone
their capacity to invest. An increase in their investment capacity operators were also earning net profits of approximately $2 a
is followed by enabled consumption smoothening and ability (by day. This translated to about $700 per annum which was con-
the poor) to face external shocks hence improving their coping siderably more than Bangladesh’s average annual per capita in-
strategies. Microfinance also sets the poor free from the ‘chains’ come of $250.
8 Stephen Mago / Journal of Asian Finance, Economics and Business Vol. 1 No.2 (2014) 5-13

In Africa, rural areas are traditionally associated with agri- studies have for example discovered a positive relationship be-
culture which is mainly subsistence. The rural economy there- tween microfinance and assets (Mosley & Hulme, 1998; Mcnelly
fore fails to explore other avenues that are vital for the allevia- & Dunford, 1998; Zeller et al., 1998, 2001).
tion of poverty. The operations are also seasonal, leading to se-
vere peaks and troughs in the economic activities of rural 2.3. Impact of Microfinance on Assets
areas. Off-seasons lack economic activity and people tend to be
idle hence production falls and this increases their vulnerability The purchasing power of the poor and low income groups
to poverty. This situation could be smoothened by injecting capi- improves when they can access finance. This permits them to
tal into the rural economy. When people receive working capital accelerate assets accumulation (Gulli, 1998). Microfinance clients
they will use it in non-farm activities (such as carpentry, weav- accumulate assets through direct loan use or use of profits gen-
ing, welding, and small businesses) that will help them to close erated from investing loans. Daley-Harris (2002) notes that the
the seasonal production gaps. Rural microfinance, in this case poor's household assets can be categorized into three. These
will encourage people to be engaged in other business ventures are those contributing to the quality of life, savings-in-kind as-
during the off-season period so as to close the gaps, thus alle- sets and productive assets. The first two categories are used to
viating poverty. provide security in the event of future emergencies or shocks.
Microfinance helps the economically active poor people to ex- Productive assets are used to promote the poor’s small busi-
pand and diversify their enterprises. It also makes them to be ness activities. Assets that are normally bought are in the small
innovative and create employment for their households and oth- economic activities category that include animals, household
er members of the community (Robinson, 2001, 2002). Access utensils, farm equipment and in some cases building houses.
to finance makes poor people to venture into sustainable busi- Daley-Harris cites a study of SHARE Microfin Limited of India
nesses meant to supplement agricultural production. The provi- where it was established that the strongest impact on poverty
sion of micro-financial resources to the poor cannot be done status was the increase in asset ownership. The study found
without some challenges. that 59% of the clients were classified as non-poor because of
Microfinance plays a twin role of enhancing agricultural pro- increased assets ownership.
duction and promoting the establishment of non-farm or off-farm Mosley and Hulme (1998) studied 13 MFIs in seven develop-
activities. Non-farm activities help consumption smoothening in ing countries2). In all cases the impact of lending tended to in-
agriculturally dominated rural areas. Zimbabwe’s mainstay of the crease the debtor’s income and improve asset position. An in-
economy used to be agriculture when she enjoyed the ‘bread crease in income and asset position is a widely acceptable
basket of Africa’ status. The status was lost as a result of so- measure of poverty alleviation. People that are in a position to
cio-political and economic challenges. Small holder farmers and increase income and assets get empowered to move out of the
peasants face very wide agricultural gaps due to lack of inputs, poverty trap. Other studies have also established increases in
droughts, cyclones and other negative conditions. These farmers education due to microfinance involvement.
need to take-up non-farm activities so that the gaps are closed.
Assets position can also be influenced through participation in 2.4. Impact on Education
microfinance programmes.
Empirical studies further uncover the relationship between mi- Attainment of education represents human capital investment
crofinance and investment. Zeller, Diagne and Mataya (1998) that improves the productive capacity of individuals. An increase
carried out impact studies in Malawi. The results were that in productive capacity will in turn improve production hence re-
greater access to credit increased the share of land allocated to ducing poverty through increased output, income and
high-yielding crops. In agriculture, land owners depend on credit employment. They found a positive net impact of credit pro-
to acquire inputs. The credit comes in cash or physical inputs. grams on both human and physical assets. But they found
Once farmers get capital, it becomes easy for them to prepare mixed results on education where education for girls increased
their farming so as to boost their yields. There is a positive re- only when women borrow. According to Brau and Woller (2004),
lationship between availability of farm inputs (seeds, fertilizers, the findings established a significant impact on well-being of
implements and herbicides) and high yields. poor households and that this impact is greater when targeted
A study by Kondo et al. (2008) in the Philippines also dis- at women. They also discovered that women tend to use mon-
covered an increase in savings by program clients. The in- ey towards meeting household needs than men. This suggests
crease in savings implies better consumption-smoothing and in- that when the program’s target is education improvement then
vestments by program members. The study also identified that women should get credit allocation. Pitt and Khandker (1996)’s
program members were kept busy in a host of business study discovered that girl children are sent to school when their
enterprises. This implies an increase in employment as people mothers are in a position to get earnings. These were made
are not idle but productive so as to fend for their families. The
study results, surprisingly, did not establish a significant impact 2) The countries were Indonesia, Bolivia, Sri Lanka, Bangladesh, India,
on health, education and household assets. However, other Kenya and Malawi. One or two MFIs were picked from these
countries (Sharma & Buchenrieder in Zeller & Meyer, 2002).
 Stephen Mago / Journal of Asian Finance, Economics and Business Vol. 1 No.2 (2014) 5-13 9

possible through microfinance programs. Thus microfinance pro- (1996)’s investigation estimated the determinants of profits result-
grams targeting women may correct the gender imbalance in ing from self-employment while controlling for capital, other
terms of education for boy and girl children. inputs. The research established that microfinance program par-
Outside the education afforded to children, microfinance pro- ticipation exerted large positive impact on self-employment
grams have been combined with education through what are profits.
termed ‘Credit With Education Programs’. The ‘Credit with Further, McKernan (1996) discovered that Grameen Bank par-
Education program’ is a strategy that was first developed by ticipation was associated with a highly significant increase
Freedom from Hunger in 1989-90 aimed at improving food se- (126%) in self-employment profits. Microfinance helps poor peo-
curity and child nutrition through adult education (Daley-Harris, ple to create their own employment. Consequently, spill-over ef-
2002).The programme was proved successful in Benin, Bolivia, fects are that they can also employ other family and/or com-
Burkina Faso, Ghana, Guatemala, Guinea, Haiti, Hondurus, munity members. This has an overall effect of reducing un-
Indonesia, Madagascar, Malawi, Mali, Philippines, Togo and employment hence reducing poverty levels and improving the
Uganda. Daley-Harris (2002) notes that the program generates standards of living of the people in the rural communities. Social
positive outcomes on participants’ knowledge of health matters, impacts are also realized.
self-reported practices and awareness of diseases. In Ghana,
Daley-Harris (2002) reports that participating women were knowl- 2.6. Social Impacts of Microfinance
edgeable about the advantages of breastfeeding as compared to
child feeding alternatives. They breastfed their children for about Microfinance activities involve, in the majority of cases, work-
six months yet the non-participants were giving their children ing in groups. This arrangement enables poor people to work in
other foods and liquids, thereby exposing them to contaminants cohesive teams hence improving social integration. Grameen
found in liquids other than breast milk. Bank’s group methodology helped people to take advantage of
Daley-Harris (2002) further reports that in Bolivia, participants ‘social capital’, which involves networking and cementation of
received education on diarrhea treatment. Participants were bet- social relations in local communities. Social capital is the glue
ter informed in dealing with diarrhea cases than non-participants. that brings the society together hence the poor people co-oper-
In the same country, microfinance participants were also better ate for a focused group goal. Most rural areas in developing
informed about immunization of children than non-participants. countries have a higher percentage of women population com-
Health workers provided education to participants during bor- position than men. This is because men migrate to urban areas
rower’s group meetings. HIV/AIDS awareness is also done dur- for employment seeking. Women are left for a long time with
ing the meetings. In Zimbabwe, Credit Against Poverty’s pro- children, hence the need for them to be empowered to make
gram combined microfinance and HIV/AIDS awareness programs economic decisions within the household. Henry et al. (2003) ar-
in the Chipinge area (Credit Against Poverty, 1999). A speci- gue that a woman with a husband who stays for a long time at
alized portfolio was introduced to cater for people infected and work is regarded the household head, hence the need to im-
affected with HIV/AIDS so as to reduce their vulnerability prove their participation in community decision making through
through access to finance. Furthermore, positive impacts of mi- microfinance program.
crofinance have also been realized on employment. A study by HSRC (2002) indicates that the increase in
HIV/AIDS incidences increases the demand for access to
2.5. Impact on Employment microfinance. This will help care giving households to have ac-
cess to finance hence smoothening household consumption. The
Unemployment is a macro-economic problem that cascades pressure on assets will in turn be reduced. Although giving mi-
down to grassroots levels. For example, the rate of unemploy- crofinance resources to the poor who are infected or affected by
ment increased tremendously in Zimbabwe due to the economic HIV/AIDS is risky, it has a benefit of ameliorating its impact
crises (2000 to 2009) that led to the collapse of industries. In through awareness, access to nutritious food, access to medical
2008, the rate of unemployment reached 80% (CSO, 2008). facilities, among other things.
During the Zimbabwean crisis, microfinance managed to be re- The US Agency for International Development’s Assessing the
silient hence people survived on small business ventures for a Impacts of Microenterprise Services (USAID’s AIMS) studies
living. ZAMFI (2005) confirms the resilience of microfinance. were done in India, Peru and Zimbabwe. This section highlights
Other authors have argued that microfinance tends to be resil- the study that was carried out in Zimbabwe. The study carried
ient during crises periods. For example during the global finan- out a longitudinal assessment of the Zambuko Trust, a micro-
cial crisis it managed to withstand the financial turmoil (Attali, finance institution in Zimbabwe. The main objective was to de-
2010; CGAP, 2008). termine the nature, extent and distribution of impacts from par-
McKernan (1996) in Brau and Woller (2004) built on the re- ticipating in the Zambuko program. Understanding the role of
search by Pitt and Khandker (1996) to evaluate microfinance’s credit within a household, and the extent to which Zambuko
non-credit impacts in Bangladesh. The study aimed at capturing reaches the poor were secondary objectives.
the other potentially important program aspects. McKernan The study used a combination of a survey, case studies,
10 Stephen Mago / Journal of Asian Finance, Economics and Business Vol. 1 No.2 (2014) 5-13

pre-survey qualitative interviews and data from Zambuko’s in- 3. Challenges of Microfinance
formation systems and secondary sources. The sample of the
survey constituted clients and non-clients that were randomly No poverty alleviation intervention has been found to be in-
selected. sulated from challenges. Thus the microfinance strategy is nei-
The data were analyzed using several statistical techniques ther a panacea nor a ‘magic bullet’ in poverty alleviation
such as chi square, t-tests and analysis of variance. The analy- (Armendariz de Aghion & Morduch, 2005; Ahmed, 2010; Zhan &
sis of covariance was also used. The impacts realized were not Wong, 2014). It is one of the strategies that can be employed
significant (Armendariz de Aghion & Morduch, 2005). Only one to assist the poor to manage their precarious lives. The most
organization (Zambuko Trust) was considered in the study conspicuous challenge facing microfinance is its ‘micro’ nature.
hence the results may not be suitable for generalization. Studies People do not want to be associated with small things. Usually,
such as this one contributed to the need for this paper. they look down upon them. Traditional banks want to deal with
large amounts of money and not the ‘small’ amounts associated
2.7. Impact on Basic Needs and Capabilities with microfinance. The other challenge is the ‘customers’ that
are served by this sector. Rich people do not want to work with
Microfinance clients’ increase income and economic security poor people.
which enable them to access basic needs. They also have the The provision of microfinance still faces a number of
ability to improve their capabilities for achieving life-giving problems. These include; inadequate financial infrastructure, un-
‘functionings’. The capabilities approach, expounded by Amartya favourable policy environment, limited institutional capacity, in-
Sen can be enhanced by the availability of financial resources adequate investments in microfinance and rural development, in-
to the poor and low-income groups. Their coping strategies are adequate investments in social intermediation and microfinance
improved by their access to finance. There is widely convincing misconceptions. The Asian Development Bank (2000) states that
literature for impacts in this area (Daley-Harris, 2002). The case the microfinance policy environment remains unfavorable in
of ‘telephone ladies’ of Bangladesh is one such an example. many countries. It does not support sustainable growth and de-
velopment of the microfinance industry. This scenario applies to
2.8. Other Impacts almost all developing countries including Zimbabwe. Government
interventions in microfinance, to address perceived market failure
According to Carr and Zhong (2002), microfinance is regarded through giving subsidized credit to the poor, undermine sustain-
as an innovative policy instrument that promotes social justice. able development. Poorly performing government supported mi-
Often, it is posited that microfinance improves the well-being of crofinance programs have had an effect of distorting the mar-
participants through job creation, increasing income and building ket thus discouraging new entrants into the industry (Adams et.
assets (wealth). It makes poor people to be homeowners al., 1984; Asian Development Bank, 2000).
through schemes such as “housing microfinance”, which is a hy- Financial infrastructures incorporate legal, information, regu-
brid of microfinance and mortgage finance. latory and supervisory systems for micro-finance institutions. The
Microfinance program provide access to the financial sector financial infrastructures are, in most cases, weak and
by the poor who suffer from exclusion. They also manage to non-supportive. Most MFIs have limited institutional capacity.
enjoy the numerous benefits that are associated with the sector They lack financial leverage and cannot provide a wide range of
such as access to loans, ability to accumulate savings and in products to clients. This is because they are not well resourced
other cases managing to get insurance and health facilities. In making them perpetual ‘infants’ (due to over-dependency) lack-
developing countries, access to traditional banking services is ing sustainability.
highly limited. The International Poverty Centre reported that To propel rural development, it is necessary to be cognizant
even in relatively successful countries such as Ghana and of the sector that underpins growth in the rural areas.
Tanzania, only about 6 percent of the population had access to Agriculture plays a crucial role hence its growth has a positive
banking services (Hailu, 2008). This scenario is a result of a impact on the growth and development of rural finance markets.
number of factors that include, among others, the demand for Rural agricultural activities are cut from the markets because of
physical collateral security by traditional banks or lack of mini- insufficient investments in physical infrastructural development
mum cash amounts needed to open a bank account. Banks fail such as roads, irrigation, electricity and other support services
to realize ‘social collateral’ (social capital) that exists among the such as marketing (Asian Development Bank, 2000). All these
rural poor (see Vermaak, 2009 for a detailed discussion of so- have negative impacts on rural microfinance. Social inter-
cial capital). The rural poor may be far away from the banks mediation3) supports a sustainable expansion of microfinance
and unfamiliar with the complex procedures involved in banking.
Microfinance Institutions (MFIs) serve the rural and urban poor 3) Social intermediation is defined broadly as a process in which
by reaching them so as to cut on transport and other trans- investments are made in the development of human resources and
action related costs. institutional capital to enable the poor to access effectively and
productively the financial services of the formal sector. Such
investments, among other things, involve awareness building among
 Stephen Mago / Journal of Asian Finance, Economics and Business Vol. 1 No.2 (2014) 5-13 11

services. This calls for an ‘integrated’ approach to microfinance lished legal and social infrastructures such as bankruptcy laws
where the whole package is given to the poor. meant to assist the poor. With the prevalence of the HIV/AIDS
Another problem with microfinance loans emanates from the pandemic in developing countries such as Zimbabwe, the poor
‘fungibility’ of financial resources. Sharma and Buchenrieder people are highly exposed and this is a serious inhibitor to the
(2002) note that even if lending institutions impose strict con- success of microfinance. An introduction of micro-insurance
ditions, credit may be used for other purposes such as leisure, would go a long way.
repaying loans from other expensive sources, financing wedding Lack of education prevents borrowers from sustaining suc-
expenses, purchasing durable goods, paying for funeral ex- cessful businesses (Magner, 2007). Illiteracy contributes to poor
penses and other related expenses. This could be reduced by business management hence borrowers backslide into poverty
putting in place effective monitoring and evaluation mechanisms. and/or default on loans. To mitigate these challenges micro-
Microfinance also suffers from misconceptions. Many people finance needs to take an integrated approach so as to provide
associate microfinance with usurious loans offered by private a full microfinance package. The three inhibiting factors are
moneylenders. The oldest misconception is that the poor people intertwined. Magner (2007) suggests that microfinance should
cannot repay loans, but the Grameen Bank (Bangladesh), the incorporate some prevention and mitigation measures so as to
BancoSol (Bolivia), the BRAC (Bangladesh); the Rakyat reduce vulnerability among the poor clients. Microfinance, as a
(Indonesia) experiences have managed to address this strategy needs to pay attention to policy objectives that address
perception. Microfinance’s penetration into the rural areas re- the commonplace challenges. Adoption of the triangle of micro-
quires a correction of the aforesaid misconceptions. finance is one such example.
At its centre, microfinance is not very different from finance
provided by banks. Its challenge is the client segment it
serves-the world’s poor. Magner (2007) notes that different sets 4. Conclusion and Implications
of challenges faced in the provision of microfinance should be
recognized. Customers of formal banks tend to be from the mid- This paper carried out an empirical literature review, finding
dle and higher income groups and live in stable environments. out more from other authors, an understanding of microfinance
However, microfinance clients live under difficult circumstances. and poverty alleviation. The paper presented an empirical re-
They face a number of negative conditions such as lack of ac- flection of microfinance and poverty alleviation. Theoretical and
cess to education and other basic needs, poor health, and empirical literature suggest that microfinance can be used to
threats from natural disasters and other environmental woes. support savings and investments, consumption smoothing and
These become inhibitors to the success of microfinance in pov- food security, agricultural activities, non-farm activities, enterprise
erty alleviation, especially in the rural areas. development and social cohesion. However, microfinance has its
The poor lack access to financial resources hence reducing own challenges that include inadequate physical and financial in-
their capability to meet their health requirements. Microfinance frastructure, unsupportive policy environment, limited institutional
could be an alternative for them to be in a position to meet capacity, inadequate investment in the rural areas, inadequate
their demand for health services. Could microfinance benefit the support in social capital development, microfinance mis-
poor’s access to health? Sickness leads to income losses, and conceptions and so on.
incapacitation of borrowers. A 2005 study carried out by the However, the overarching question is about the viability of mi-
Harvard Medical School and Harvard Law School established crofinance as a strategy for alleviating rural poverty and its effi-
that 50 percent of all people interviewed cited illness and un- cacy as a strategy in the different contexts. Therefore, there is
affordable medical bills as the primary causes of bankruptcy need to contextualize macroeconomic policy, microfinance and
(Magner, 2007). poverty for policy development. Our findings show that micro-
One of the challenges of microfinance is that the poor people finance enhances poverty alleviation. This therefore suggests
are not protected by insurance hence their activities tend to be that the government, especially in developing countries, should
risky. Todd (1996) as cited in Magner (2007) carried out a put in place policies that support the development and ex-
study of Grameen Bank clients and discovered that serious ill- pansion of the microfinance sector. A conducive microfinance
ness in the family always forces households to liquidate assets operational environment will promote the growth of the sector
in order to pay for medical treatment and/or keep the family thus strengthening its poverty alleviation potential.
afloat. The disaster of illness struck ten of the 17 Grameen
Bank families who are still in the poverty group (Magner, 2007,
p.11). Poor people are very vulnerable because they lack safety
nets. Unfortunately, developing countries do not have estab-
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