3. How does microfinance help the poor?

Experience shows that microfinance can help the poor to increase income, build viable businesses, and reduce their vulnerability to external shocks. It can also be a powerful instrument for self-empowerment by enabling the poor, especially women, to become economic agents of change.

Poverty is multi-dimensional. By providing access to financial services, microfinance plays an important role in the fight against the many aspects of poverty. For instance, income generation from a business helps not only the business activity expand but also contributes to household income and its attendant benefits on food security, children's education, etc. Moreover, for women who, in many contexts, are secluded from public space, transacting with formal institutions can also build confidence and empowerment.

Recent research has revealed the extent to which individuals around the poverty line are vulnerable to shocks such as illness of a wage earner, weather, theft, or other such events. These shocks produce a huge claim on the limited financial resources of the family unit, and, absent effective financial services, can drive a family so much deeper into poverty that it can take years to recover.

Related background resources:

Microfinance, risk management and poverty
Cohen, M.; Sebstad, J.
Washington, DC: Assessing Impact of Microenterprise Services
(AIMS), Management Systems International / USAID (2000)

The microfinance revolution
Morduch, J.
Cambridge, Mass.: Harvard University (1997)

Rural finance for food security for the poor: Implications for research and policy
Zeller, M.; Schrieder, G.; Braun, J.; Heidhues, F
(Food policy review 4) Washington, D.C., USA: International
Food Policy Research Institute (IFPRI) (1997)