Poverty Reduction through Microfinance: A Capability Perspective

Abstract

The importance of assessing the impact of microfinance schemes on poverty reduction cannot be overestimated. Poverty reduction is the raison-d’être of microfinance. It is because other forms of finance are not usually accessible to the poor (due to high transaction costs, the poor’s lack of collateral, etc) that microfinance has been explored as a possible solution to poverty reduction. But it is more than that. The assumption underlying this argument is that poverty is partly explained by lack of economic opportunities and that microfinance can provide a sustainable path towards viable surviving economic strategies. Therefore, microfinance can be important not only because it can lead to poverty reduction but mainly because it promotes, in a non-patronizing and decentralized way, economic alternatives to the poor that are in principle more sustainable (permanent) in the long-run. Microfinance can be compared with other poverty reduction initiatives based on paternalistic concessions (e.g., basic income programmes) that are a priori unsustainable in the long-run because they are dependent on a continuous inflow of resources.