The authors of this report reviewed evidence of the effects of microfinance institutions (MFIs) on poverty in developing economies. Although a number of case studies demonstrate a positive relationship between microlending and poverty reduction, the impact of microlending varies significantly from one location to the next, raising questions regarding its effectiveness.
This study includes “short term” and “long term” models for analyzing data from Zimbabwe covering the years 2009 to 2019. The short-run model resulted in three findings: (1) increased poverty increased the growth of microfinance lending volumes; (2) there was bidirectional causality between increased microlending and the growth of small and medium-sized enterprises (SMEs); and (3) the growth of SMEs alleviated poverty. However, there was no evidence that microlending affected poverty significantly in the short term.
The long-run model likewise indicated that SME growth reduces poverty. Similarly, the authors found agricultural development to decrease poverty. On the contrary, the growth of MFI lending increased poverty in the long term. This may be related to another of the study’s findings, which is that microfinance loans generally are not utilized efficiently to enhance the productivity of microbusinesses. The authors contend this points to a lack of entrepreneurial education amongst borrowers. In response, the authors recommend policymakers and regulators push stakeholders to equip microborrowers with better knowledge and tools for using debt effectively, with the aim of increasing productivity, decreasing default rates and reducing poverty.
This is a summary of a paper by Collin Chikwira, Edson Vengesai and Petronella Mandude; published by the Journal of Risk and Financial Management; September 2022; 13 pages; available at https://www.mdpi.com/1911-8074/15/9/393/pdf.
By Vaughn Rajah, Research Associate
Additional Resources
Journal of Risk and Financial Management webpage
https://www.mdpi.com/journal/jrfm
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