Microenterprise finance: is there a conflict between growth and poverty alleviation?

Paul Mosley, David Hulme

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Microenterprise finance has generated enormous enthusiasm among aid donors and nongovernment organizations (NGOs) as an instrument for reducing poverty in a manner that is financially self-sustaining. Although something of a consensus has emerged concerning the principles by which such institutions should be designed, however, we know little about their impact. The paper reports on a research project which estimated the impact of 13 microfinance institutions in seven developing countries on poverty and other target variables, and attempted to relate such impact to the institutions' design features. For each of the institutions studied, the impact of lending on the recipient household's income tended to increase, at a decreasing rate as the recipient's income and asset position improved, a relationship which can easily be explained in terms of the greater preference of the poor for consumption loans, their greater vulnerability to asset sales forced by adverse income shocks and their limited range of investment opportunities. There are significant outliers to this general pattern (in particular, very poor people who have been able to achieve significant loan impact); but they are the exception rather than the rule, and the relationship is significant at the 1% level for all the institutions studied except the Malawi Mudzi Fund. This relationship defines, in the short term, an 'impact frontier' which serves as a tradeoff: lenders can either focus their lending on the poorest and accept a relatively low total impact on household income, or alternatively focus on the not-so-poor and achieve higher impact. The position and slope of the estimated impact curve vary however with the design of the institution: for 'well-designed' schemes impact, at all levels of income, is higher than for ill-designed schemes. Hence for many lender institutions the tradeoff can often be moved by appropriate innovations in institutional design, in particular modifications to savings, loan collection, and incentive arrangements for borrowers and staff.
Original languageEnglish
Pages (from-to)783-790
Number of pages7
JournalWorld Development
Issue number5
Publication statusPublished - May 1998

Research Beacons, Institutes and Platforms

  • Global Development Institute


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