What Do We Know about the Impact of Microfinance?

In September 2000, the member states of the United Nations unanimously adopted the Millennium Development Goals (MDGs), a set of eight, specific, measurable, time-bound targets that challenge countries to improve the welfare of the world’s poorest people. There is mounting evidence to show that the availability of financial services for poor households – microfinance – can help achieve the MDGs.

Eradicate extreme poverty and hunger

Empirical evidence shows that, among the poor, those participating in microfinance programs who had access to financial services were able to improve their well-being both at the individual and household level much more than those who did not have access to financial services.

• Bangladesh Rural Advancement Committee (BRAC) clients increased household expenditures by 28% and assets by 112%.
• After more than eight years of borrowing, 57.5% of Grameen borrower households were “no longer poor” as compared to 18% of non-borrower households
• In Lombok, Indonesia, the average income of Bank Rakyat Indonesia (BRI) borrowers increased by 112%, and 90% of households graduated out of poverty.
• In Vietnam, Save the Children clients reduced food deficits from three months to one month.
• At Kafo Jiginew in Mali, clients who has been with program for as little as one year were significantly less likely to have experienced a period of acute food insecurity; and those that had, had experienced a shorter period.

Achieve universal primary education

Increased incomes, savings and education loan products provide poor people with the ability to invest in their children’s future, particularly in their education. Empirical evidence indicates that, in poor households with access to financial services, children are not only sent to school in larger numbers, but they also stay in school longer. Even where children help out in family enterprises, the poverty-induced imperative of child labor decreases, and school drop-out rates are much lower in client households than in non-client households. Studies on the impact of microfinance on children’s schooling show that:

• In Bangladesh, almost all girls in Grameen client households had some schooling, compared to 60% of girls in non-client households. The schooling rate for boys was significantly higher - 81% of boys in client households received some schooling, compared to 54% in non-client households. Basic competency in reading, writing, and arithmetic among children 11 to14 years old in BRAC member households increased from 12% in 1992 to 24% in 1995, compared to only 14% for children in non-member households.
• In Honduras, Save the Children clients increased earnings, which enabled them to send children to school and to lower dropout rates.
• In Peru, Acción Communitaria del Peru-borrower households spent 20% more on schooling for their children than non-borrower households.

Promote gender equality and empower women

There is strong evidence that access to financial services and the resultant transfer of financial resources to poor women, over time, lead to women becoming more confident and assertive. Access to finance enables poor women to become economic agents of change by increasing their income and productivity, access to markets and information, and decision-making power. This empowerment is very real, and can take different forms:

• In Indonesia, female clients of BRI were more likely than non-clients to make joint decisions with their husbands concerning allocation of household money, children‚s education, use of contraceptives, family size, and participation in community events.
• In Bangladesh, a survey of 1,300 clients and non-clients showed that credit clients were significantly more empowered than non-clients in terms of their physical mobility, ownership and control of productive assets (including land), involvement in decision making, and awareness of legal and political issues.
• In Nepal, 68% of Women’s Empowerment Program members said that they made decisions on buying and selling property, sending daughters to school, arranging children's marriages, and family planning.
• In India, SEWA clients have lobbied for higher wages, the rights of women in the informal sector, and resolution of neighborhood issues.
However, it would be wrong to assume access to financial services automatically has a positive impact on women’s welfare. In some instances, women’s access to microfinance may result in increased violence within the household, leaving them with a greater loss of power. Women borrowing for a microenterprise may end up being forced to work longer hours and lose control over financial resources and decision making to male members of the family. Neither should microfinance be seen as a substitute for dealing with key structural issues pertinent to women and poverty, such as lack of skills and education, or legislation that discriminates against women (e.g., property rights, agrarian or land reform, trade agreements).
Combat HIV/AIDS, malaria, and other diseases

Reduce child mortality and Improve maternal health

Hunger and illness are generally the most important risk that poor people face. Time taken off from work because of an illness and health care-related expenses erode incomes and savings and often force the poor to sell assets and go into debt. The death of a breadwinner further decreases a poor family’s well-being. Increased earnings, savings, and, increasingly, insurance allow clients to seek out health care services earlier, before conditions deteriorate. In addition, many microfinance institutions actively promote health education. This may take the form of a few simple, preventive health care messages on immunization, safe drinking water, and pre-natal and post-natal care. Some programs provide credit products for water and sanitation that directly improve clients’ living conditions.

• In Bangladesh, a study of BRAC clients found that fewer members suffered from severe malnutrition than non-clients and that the extent of severe malnutrition declined the longer clients stayed with BRAC.
• There are no studies that have specifically quantified the effect of microfinance on families or communities affected by HIV/AIDS. However, numerous articles cite access to savings and health insurance as important factors in helping to combat HIV/AIDS.
• In Bangladesh, Grameen clients showed a higher rate of contraceptive use (59%) than non-clients (43%). This is attributed to clients’ increased awareness of contraceptive programs (from attending group meetings), and from increased mobility, which allowed women to seek out such services.
• In Bolivia, a study found CRECER clients had better breast-feeding practices, responded more with rehydration therapy for children with diarrhea, and had higher rates of DPT3 immunization for children.
• In Ghana, Freedom from Hunger clients also demonstrated better breast-feeding practices, and their one-year-old children were healthier in terms of weight-for-age and height-for-age, compared to children of non-clients.

Ensure environmental sustainability

There has been very little research on the specific impact of microfinance on environmental sustainability. However, around two billion people around the world use kerosene (paraffin) for household lighting, consuming the equivalent of 1.7 million barrels of petroleum a day, greater than the petroleum production of Libya. Many of these poor people are, or could be, microfinance clients. Recently, new technologies, in particular inexpensive, reliable solar/light-emitting diode (LED) systems, have opened up the possibility of consumer lighting products that are cost-competitive with kerosene lighting, even for very poor people. The market for clean energy products is enormous; there are 200 million households in Africa alone that could switch from kerosene to solar/LED lighting.

Grameen Shakti is a non-profit company, part of the Grameen family, which is distributing clean energy products in remote areas of Bangladesh. As of December 2006, it had installed 77,000 solar home systems and 500 biogas plants. Grameen Shakti attributes its success to linking solar installations to income generating activities, and to fostering a network of local energy entrepreneurs – who may also be microentrepreneurs - to assure installation and service.

Develop a global partnership for development

Microfinance alone will not bring about the achievement of the Millennium Development Goals. Government, donors and key stakeholders will need to work together on a series of strategies and activities to reduce poverty and achieve the MDGs, among them: education, health care, housing, transportation, improved agriculture, expanded markets, and access to information.

That being said, access to financial services does allow people to improve their own human capital (schooling, health care) and allows for the potential for improved social capital as clients become more empowered and integrated into markets. Whether they save or borrow, evidence shows that when poor people have access to financial services, they choose to invest their loans, additional earnings, or savings in a wide range of activities and assets that benefit not only their businesses but also their households. Thus access to financial services provides the poor with the means to achieve most of the MDGs—on their own terms, in a sustainable way.