The spectacular growth of the microfinance industry has been fueled not by market forces but by conscious actions of national governments, nongovernmental organizations (NGOs), and donors who view microfinance as an effective tool for alleviating poverty. Since much of the impetus behind this large and increasing support for microfinance hinges on the assumption that its economic and social impacts are significant, it needs to be examined more closely. This review... indicates that impact studies themselves must be improved to make more accurate assessments of benefits. This is important, for only through cycles of innovation, experimentation, and evaluation can we hope to establish lasting institutions that alleviate the financial constraints faced by the poor.Microfinance Evaluation. ,Microenterprises Finance. ,Non-governmental organizations. ,Government spending policy. ,Poverty alleviation. ,Evaluation. ,Financial institutions. ,

Sharma, Manohar

English

Research Papers in Economics

R R U U R R A A L L     F F I I N N A A N N C C I I A A L L     P P O O L L I I C C I I E E S S    
f f o o r r     F F O O O O D D     S S E E C C U U R R I I T T Y Y     o o f f     t t h h e e     P P O O O O R R  
 
 
IFPRI 
 
 
 
 
 
 
 
RESEARCH 
PROGRAM 
MISSION 
The research 
program titled Rural 
Financial Policies 
for Food Security of 
the Poor seeks to 
identify policies and 
institutional 
arrangements that 
help the poor 
integrate themselves 
into sustainable 
savings and credit 
systems in order to 
increase capacity to 
invest, bear risk, and 
preserve livelihoods.
 
FOCUS 
COUNTRIES 
• Bangladesh 
• Cameroon 
• China 
• Egypt 
• Ghana 
• Madagascar 
• Malawi 
• Nepal 
• Pakistan 
 
ABOUT THE 
AUTHOR 
Manohar Sharma is 
a postdoctoral 
fellow of the Food 
Consumption and 
Nutrition Division at 
IFPRI. 
POLICY BRIEF No. 2   •   MARCH 2000 
The spectacular growth of the microfinance industry 
has been fueled not by market forces but by con-
scious actions of national governments, nongovern-
mental organizations (NGOs), and donors who view 
microfinance as an effective tool for alleviating 
poverty. Since much of the impetus behind this 
large and increasing support for microfinance hinges 
on the assumption that its economic and social 
impacts are significant, it needs to be examined 
more closely. 
 
 
 
Some question the value of assessing impact in 
the first place, arguing that when institutions that 
serve the poor attain financial viability, a level of 
impact that justifies investment is automatically 
assured. After all, profitability—the extent to which 
revenues exceed costs of providing services—is a 
reflection of the extent to which returns to clients 
from whatever they finance are high enough to pay 
for the financial services they received. This 
approach, however, is not of much help when it 
comes to evaluating institutions that are not yet 
financially sustainable but that are assumed to make 
significant contributions to poverty alleviation and 
depend on continuing public support to remain 
operational. When confronted with this type of 
situation, policymakers, who have to allocate public 
resources between competing ends, ask how credit 
programs affect broader social goals such as 
adoption of agricultural technology, income genera-
tion, and attainment of food security. Sometimes 
even broader goals are considered such as women’s 
empowerment or environmental quality. Assessing 
these benefits helps policymakers evaluate the 
relative weight to attach to credit programs vis-à-vis 
other poverty alleviation programs and helps them 
answer the question of whether shifting resources 
away from other poverty programs toward credit-
based programs is good social policy. 
 
 
 
 Two types of impact studies have been conducted. 
First are those that may be termed “investment-led,” 
since they attempt to measure returns on credit as an 
input that facilitates investment. They attempt to 
answer the question of whether greater access to 
credit leads to greater levels of income, wealth, and 
consumption. The second type of studies may be 
termed “insurance-led,” as they measure the extent 
to which access to credit assists households in 
upholding essential expenditures in the aftermath of 
unexpected income shocks (e.g., bad harvests) or 
expenditure shocks (e.g., health emergencies). A 
common methodological problem in conducting 
impact research is the difficulty of finding a satis-
factory control group that can be used to isolate the 
effects of improved access to microfinance services. 
For example, the level of entrepreneurial skill is 
likely to affect an individual’s decision to join a 
microfinance program. But because entrepreneurial 
skill is hard to observe and quantify, finding a con-
trol group that actually controls for this unobserved 
trait would be difficult. This, in turn, makes it 
difficult to obtain a clean estimate of the effects of 
improved access. In recent years several studies 
have attempted to address this problem by using 
quasi-random experimental methods, qualitative 
surveys, special instruments that measure access to 
credit, and panel data techniques. However, two 
additional caveats are noted. First, investments yield 
a flow of returns over time, so the time profile of 
The Format of Impact Studies 
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE 
2033 K STREET, NW, WASHINGTON, DC 20006-1002 USA 
Web: www.ifpri.org   •   Phone: 1-202-862-5600   •   Fax: 1-202-467-4439   •   Email: ifpri@cgiar.org 
Impact of Microfinance on Poverty Alleviation: What Does 
Emerging Evidence Indicate? 
MANOHAR SHARMA 
Why Measure Benefits  
ABOUT IFPRI 
 
IFPRI’s mission is 
to identify and 
analyze strategies 
for meeting food 
needs of the 
developing world, 
with particular 
emphasis on low-
income countries 
and the poor. 
 
IFPRI is a member 
of the Consultative 
Group on 
International 
Agricultural 
Research (CGIAR). 
 
- - - - - - - - - - - - - - 
 
Any opinions 
expressed herein are 
those of the 
author(s) and do not 
necessarily reflect 
those of IFPRI. 
 
- - - - - - - - - - - - - - 
 
CONTACT 
Bonnie McClafferty 
Communications 
Specialist 
B.McClafferty@ 
   CGIAR.ORG  
 
yields and the timing of the impact study have an 
important bearing on the magnitude of benefits 
reported. Second, many microfinance institutions 
bundle credit with other services (training, health, 
etc.) and the reported impact is likely to include the 
effect of such services. 
 
 
 
Overall, the investment-led studies present mixed 
results of the impact of credit on various indicators 
affecting household welfare. Apart from methodo-
logical differences, country- and program-specific 
conditions drive results of these studies. For ex-
ample, the extent to which households have access 
to other complementary production inputs may 
affect the returns to credit. Studies in Bangladesh, 
Malawi, and Madagascar reiterate that access to 
credit carries good returns to poor households only 
when complementary inputs such as seeds or 
irrigation water, or market access are present.  
The impact of credit on household food security 
via increases in household productivity and income 
also falls under the same caveat as above. However, 
it is found again and again that most loans taken by 
the poor, especially in the informal sector, are for fi-
nancing consumption-related expenditure, especially 
during low-income seasons. Despite this fact, the 
effect of credit on the nutritional status of children 
has generally remained unclear—mainly because 
nutritional outcomes are strongly conditioned by 
many other factors on which credit, by itself, has 
little effect. 
Many microfinance services in Asia and Africa 
target women on the assumption that empowering 
women and targeting services to them leads to better 
allocation and use of household resources. Several 
studies in Bangladesh support this assumption, 
indicating that services directed to women signifi-
cantly increase assets, incomes, and educational 
attainment of children, especially girls. But positive 
gender effects cannot always be taken for granted, 
as other studies, also in Bangladesh, highlight cases 
where only a few of the targeted women were able 
to exercise effective control over loan use. Some 
point out that some-times the very lack of women’s 
empowerment makes it easier for program managers 
to enforce loan conditions, thus making them 
preferable borrowers. 
 
  
 
 A number of studies in Asia suggest that poor 
households generally use a combination of savings, 
credit, and increased wage employment to cope with 
income volatility and unexpected expenditure 
requirements. Access to credit and saving services 
makes it feasible for households to borrow during, 
or save for, adverse times; thus access to financial 
services has an important impact on the welfare of 
the poor. The importance of access to financial 
services increases with the severity of income 
downturns. When households confront severe events 
such as floods or drought that depress their incomes 
temporarily, access to financial services, especially 
in the informal sector, enables them to buy enough 
food to maintain the nutritional status of their 
children and finance other important activities such 
as education.  
The insurance cover provided by access to credit 
and savings also has an impact on the efficiency 
with which household resources are managed. For 
example, with the insurance cover, poor households 
may be emboldened to undertake more efficient, 
albeit riskier, projects to increase household income, 
such as adoption of new agricultural technology or 
off-farm microenterprise. Insurance benefit studies 
show evidence of consistent positive impact, per-
haps because insurance benefits, unlike investment 
benefits, are conditioned less by access to or 
ownership of other comple-mentary inputs. 
 
 
 
Impact-benefit studies are still somewhat clouded 
by methodological issues, i.e., the difficulty of 
obtaining a comparable control group. There are 
also several other considerations. First, most credit 
programs studied are actually hybrids that bundle 
credit with other services such as health and 
education. Disentangling credit impact from overall 
impact and accounting for the full range of benefits 
produced by a program is a challenging task. Sec-
ond, many microfinance programs also induce em-
powerment at the community level by enabling col-
lective action as well as by setting the foundation 
for sustainable community-based organizations. A 
more complete evaluation needs to account for these 
types of benefits. Third, many impact studies fail to 
reveal the exact processes by which poverty is 
affected. To improve the impact of microfinance, 
more explicit discussion of the actual process of im-
pact is needed. Finally, impact has been evaluated 
only for the most successful programs, and general-
ization can be dangerous. 
Whatever the current size of impact, further 
increases in benefits per dollar of investment criti-
cally depend on cost-saving innovations that micro-
finance institutions make. Public support to fuel this 
process is critical, especially since private market-
based initiatives are hardly forthcoming. Returns on 
such efforts will be substantial, but strongly condi-
tioned on access to other comple-mentary inputs. 
Our review also indicates that impact studies them-
selves must be improved to make more accurate 
assessments of benefits. This is important, for only 
through cycles of innovation, experimentation, and 
evaluation can we hope to establish lasting insti-
tutions that alleviate the financial constraints faced 
by the poor.￿ 
Remaining Gaps 
Results of Investment-Led Studies 
Results of Insurance-Led Studies 

Impact of microfinance on poverty alleviation

http://www.ifpri.org/sites/default/files/publications/mp05_brief02.pdf

Impact of microfinance on poverty alleviation

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