Impact of Finance on Poverty Reduction and Social Capital Formation: A Review and Synthesis of Empirical Evidence

Publication Date: 1999
Published by: Giordano Dell'Amore Foundation
Document Type: Journal Article

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Does the poor's access to and participation in microfinance lead to positive welfare changes?

Poverty in developing countries is often tied to imperfections of the socio-economic environment, particularly in the financial markets. However, financial markets are thin in most low- income regions of developing countries. Conditions are changing, nevertheless, more so for Asia and Latin America than for Sub-Saharan Africa.

Financial innovations associated with microfinance appear to reduce costs of financial intermediation at the agent and client level. While strong claims are made for microfinance interventions in reducing poverty, this effect cannot be taken for granted. But the assumption that microfinance has a positive impact on welfare is adopted if a microfinance intermediary appears to be financially sustainable.

Based on a comprehensive literature review, paper discusses and analyses empirical studies that research the question as to whether the poor's access to and participation in microfinance lead to positive welfare changes. As the findings of impact analysis at the client level of microfinance should always be fed back to improve the design and implementation of the intervention at the agent level, the most important performance indicators of microfinance are reviewed as well.

The article concludes with policy and research implications. [adapted from author]