Deconstructing 4 microfinance myths

The jury is still out on the systematic welfare impact and value-addition from the expansion of targeted microfinance market interventions for the poor. We present the following four key insights from a study of 64 low- and middle-income households in rural and urban southern India today on how they use various financial products, services, and instruments (including microfinance) to manage their money: (1) respondents borrow for several reasons other than ‘small enterprise development’ (only 30% share) – it is important to unmarry ‘microfinance’ from ‘small enterprise development’ to objectively assess its welfare impact along multiple dimensions; (2) microfinance remains one (30-35% share) among many formal, semi-formal and informal savings and credit channels used by poor households to manage their income and consumption streams, and negotiate risk; (3) there appears to be some link between being marginally ‘better-off’ in our sample and being affiliated with microfinance in some form – however, interpreting this will involve solving the causal inference quandary; (4) microfinance loans at 24-36% interest rates are considered ‘cheap’ (not exploitative) in our respondents’ environment – attractive terms of finance involve much more than just the stated interest rate. We present these findings to contradict popular rhetoric on the subject, and provide food for thought to any person/ institution interested in using market mechanisms to alleviate poverty.

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