Critically discuss the following statement: “Microfinance stands as one of the most promising and cost-effective tools in the fight against global poverty.”, Jonathan Morduch, UN Expert Group on Poverty Statistics.

Microfinance, as a special arrangement form of financial system, a provision of financial services to poor and low-income groups, has made important contribution poverty alleviation in many developing countries. Scholars have different view on microfinance which can relieve and eliminate poverty. Most scholars believe that microfinance has a positive impact on poverty reduction by providing basic financial services such as providing financial credit to the poor. However, some scholars believe that microfinance is not enough to cover all the poor people living in extreme poverty and directly make benefit. Moreover, the commitment of microfinance relates to too many social functions which lead to economically unsustainable.

Theoretical Studies on Reducing Poverty in Microfinance

The Microfinance Annual Conference (2005) noted that many qualitative and quantitative studies have shown that microfinance has a positive impact on the well-being of the poor and contributes positively to anti-poverty efforts. But there are many uncertainties that affect their assessment of the extent to which microfinance is reducing poverty. Nazrul Islam (2009) argues that microfinance must have an impact on poverty reduction, and that microfinance not only indirectly affects finance, but also reduces poverty through indirect means. Gulli (1998) analyzes the impact of microfinance on poverty reduction. In her view, the main contribution of microfinance to poverty reduction is to help the poor overcome financial credit constraints and manage their money. Microfinance services can be divided into two categories: 1) consumption and household’s risk management and 2) production and investment. These financial services can play a dual role to the poor, that is, poor families in the face of income fluctuations in the Consumption smoothing, but also to enhance its economic activities.

Bakhtiari (2006) summed up the anti-poverty practices of micro-finance institutions of Grameen Bank in Bangladesh, Rakyat Bank in Indonesia, BAAC in Thailand, SHARE in India and CARD in the Philippines. He claimed that the micro-finance mainly through the smooth consumption of the poor, better management of risk, and gradually build the poor’s assets to help the poor development of micro-enterprises and other direct ways to improve the poor’s ability to generate income and improve the quality of life of the poor. Moreover, it reduces poverty by improving the allocation of resources, cultivating the market environment and accelerating the use of new technologies to promote economic growth. De Aghion & Morduch (2006) summarizes the direct income effects of microfinance on poor households, indirect income impacts through non-financial benefits such as additional training and education, and enhanced family social relations and self-esteem. Bail Swain and Floro (2007) found that microfinance’s risk response mechanism can improve the participant’s ability to control risk, thereby reducing their vulnerability, good for poverty reduction.