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Microfinance and Poverty

Monique Cohen Microfinance Opportunities November 2002


Poverty Impacts of Microfinance • Increases in incomes and investment in assets • Reduction of vulnerability: increased ability of the poor to cope with shocks and economic stress events • Improved personal financial management


Impacts at the Level of the Household • Investment in physical, financial, human and social assets (build and change the mix of assets); • Increases in household income and diversification of income sources; • Take advantage of opportunities as they present themselves (from reactive to proactive)


Impacts at the Level of the Enterprise • No impact on primary enterprise revenue • Positive impact on combined enterprise revenue • Small but positive impacts on enterprise employment • Limited impact on combined enterprise productive assets


Impacts at the Level of the Individual/Client • Microfinance empowers women through control of decision making over the assets they manage and through access to knowledge • Married women actively make decisions jointly with their spouses and rarely forfeit their contribution to this decision making process • Clients are more likely than non-clients to have individual savings accounts


Emerging Consensus • Microfinance is not a magic bullet • Microfinance contributes to the process of poverty alleviation (direct and indirect) • Reducing vulnerability and risk is an important impact of microfinance. However, microcredit is better for protecting against risk (ex ante) that coping with risk after the shock (ex post)

• Microenterprise is only one use of microfinance • Microfinance is only one of several sources of finance that client juggles • Context matters: – The economy – Length of time client has been in program and the resource endowment of the client – Program elements: mission, products and services


Improving Poverty Impact of Microfinance? Market-Led Microfinance Not Product-Led microfinance


Responding to Household Life Cycle Financial Needs Household Formation

(C,S,I)

Death (C, I)

Old Age

Birth

Working Capital (C) Productive Assets (C) Investments (S) Asset protection (I) Health

(C,S,I)

Education

(I,S)

(C,S)

Marriage Ceremony (C,S)


Market-Led Microfinance – Match products to clients’ needs – Match repayment amounts and cycles to clients’ needs – Match loan size to clients’ needs – Match household financial flows and repayment cycles


microfinance and poverty