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April 05, 2008

An introductory look into the research of Microfinance

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This blog and our research into the prospects of microfinance as a global development tool begins by looking at Jon Westover's journal, "The Record of Microfinance: The Effectiveness/ Ineffectiveness of Microfinance Programs as a Means of Alleviating Poverty". The reason we are looking at this journal because it provides key outlines into the downfall and limitations of most research of microfinance in highlighting its strengths and weaknesses. Jon Westover, in his journal alos highlights some key strength's and weaknesses found by academic research into microfinance.

According to this journal, the main things any research into microfinance needs to look at is:

  1. Despite the increased popularity of microfinance, what is the record of such programs?
  2. What is the effectivenes/ineffectiveness of such programs on reducing poverty?
  3. What are the predominant methodological approaches in the microfinance research literature?

Westover's argument is that as microfinance programs increase globally, it also becomes increasingly important for there to be a formal investigation into its global effectiveness.

Some key strengths and positive impacts of microfinance programs in poor and impoverished areas of the world that Westover highlights in his journal include:

  • Microfinance programs can be an effective way to provide low-cost financial services to poor individuals and families (Miller & Martinez 2006, Stephens and Tazi 2006).
  • Such programs help in the development and growth of the local economy allowing individuals and families to move past subsistence living, and therefore increases their disposable income levels (Khandker 2005).
  • Many academic qualitative research have shown microfinance programs are able to reduce poverty through increasing individual and household income levels as well as improving healthcare, nutrition, education and helping to empower women (Khandker 2005).
  • Microfinance programs increase access to healthcare, making prventive healthcare more affordable to the poor.
  • It allows for more children to be sent to school ants day enrolled longer (Murdoch 1998).
  • Since microfinance services are primarily focused on women, it is argued that this leads to the empowerment of women and the breaking down of gender inequalities, through providing opportunities for women to take on leadership roles andresponsibilities (Goetz and Gupta, 1995).

Westover also highlights a few key reported problems and negative impacts of microfinance and microcredit programs:

  • Some studies have shown that microfinance programs benefit the moderately poor

    more than the destitute, and thus impact can vary by income group (better-off benefit more from microcredit) (Copestake et al., 2001; Morduch, 1998; Dugger, 2004).
  • Most microfinance programs target women (due to higher repayment rates), which may result in men requiring wife to get loans for them (Goetz and Gupta, 1995).
  • Examples exist of a vicious cycle of debt, microcredit dependency, increased workloads, and domestic violence associated with participation in microfinance programs (Copestake et al., 2001; Morduch, 1998).
  • Studies have shown that there are low repayment rates in comparison with traditional financial institutions (Miller and Martinez, 2006; Stephens and Tazi, 2006), thus possibly contradicting one of the key strengths listed above, that such programs can lead to empowerment and increased self-confidence through responsible loan repayment.
  • There have been reports of the use of harsh and coercive methods to push for repayment and excessive interest rates (Business Week, 2005; The Financial Express, 2005).
  • Finally, concerns have been raised that the reliance on microfinance programs to aid the poor may result in a reduction of government and charitable assistance (“privatization of public safety-net programs”) (Neff, 1996).

Jon Westover's journal also highlights another key point. Despite variuos articles outlining key strengths and weknesses of micorfinance programs, many of the research conducted is hugely flawed. As Westover highlights, "Much of the literature reporting positive results of the impact of microfinance programs in reducing poverty fails to meet a rigorous level of study design and statistical analysis, using qualitative methods, looking at single cases or specific areas or regions, using cross-sectional data, analyzing self‐reported measures, and using non-random sampling procedures, resulting in findings that cannot be easily replicated nor generalized to all programs. In contrast to the common qualitative and case-study approaches in the less rigorous body of research, only a handful of studies use sizeable samples and appropriate treatment/control frameworks to answer the questions of real impact and effectiveness............Until more such studies are conducted and findings reported, we must take the findings of less rigorous impact studies with a grain of salt and not be too quick to generalize findings of the impact and effectiveness of a specific program, in specific location, at a specific time, to other cases."

Some other articles and journals that may be of interest to look at are:

  • Khandker's 2005 article: Microfinance & Poverty: Evidence using Panel Data from Bangladesh.
  • Kan, Olds and Kah 2005 (Senegal)
  • Morris and Barnes 2005 (Uganda)
  • Copestake, Bhalotra & Johnson 2001
  • Morduch 1998

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