Credit, Microfinance and Empowerment

Notwithstanding the mixed evidence, microfinance reduces poverty, vulnerability to health shocks and hastens recovery after a natural disaster. There are heterogeneous impacts in terms of women’s empowerment across households that vary with gender-defined social norms. Group lending attempts to overcome the dual problem of missing collateral and lack of intermediary capital. However, in recent years, there has been a shift towards individual lending contracts, in part a response to client complaints that group lending creates excessive peer pressure within groups. Shift of the focus to financial sustainability raises serious concerns about dilution of the outreach of microfinance (i.e. the number (breadth) and socio-economic level (depth) of the clients served by MFIs).That the trade-off exists is undeniable but little is known about its extent. However, retaining a non-profit charter signals commitments not to divert donated resources for personal gain. This may also help attract outside capital donations and prevent mission drift. Use of existing social networks between current and new microfinance clients may help reach out to the poor at a considerably lower cost than when such networks are not used. In sum, while the magic of microfinance has eroded with financial sustainability overriding social goals, there are ample grounds for optimism about resolving this trade-off.