This chapter critically examines how microfinance has been used to reduce poverty rates in developing economies. To achieve this goal, a critical review of existing literature on microfinance outcomes on reducing poverty in developing countries was carried out. Based on the review of literature, this chapter concludes that microfinance positively impact poverty levels in developing countries. However, the chapter also shows that access to microfinance may contribute to higher poverty rates as some studies have produced marginal or negative success, while others yielded positive successes, making it very difficult to generalise the outcomes. The growing popularity of microfinance as a financial inclusion strategy and the high number of empirical studies on the subject have produced new evidence that needs further examination with complex research methodologies to determine its impact on poverty reduction, as outcomes of the current studies are mixed.
TopIntroduction
All over the world, people who are poor are often left out of the formal financial systems. In developing countries where poverty levels are higher, the poor is completed excluded from the formal financial systems. In this regard, to address their financial needs, poor people, particularly in developing countries have created a wide range of informal financial systems. Besides, a number of private and public sector organisations have been purposely set up in recent times to address this financial exclusion gap. The term microfinance has become synonymous to these alternative informal and perhaps quasi-formal arrangements set up to offer financial services to the poor. The basic idea of microfinance is that; if poor people are provided access to financial assistance, including credit, they may be able to start or expand a microenterprise that will allow them to break out of poverty (Bindu and Aanchal, 2013).
Al-Amin and Mamun (2022) define microfinance as the provision of small loans to financially disadvantaged individuals who are unable to access such services from traditional financial institutions. Microfinance has also been defined from the perspective of beneficiaries. For instance, Hasan et al., (2022) described microfinance as a potential source of income to the needy and an effective tool that can assist low-income earners to improve on their living standards. A more comprehensive definition of microfinance is provided by Prathapet al., (2018) who refers to microfinance as the provision of both financial (loans, savings and insurance) and non-financial (financial literacy training, management skills development, group formation and self-confidence building) services to low-income earners and the self-employed.
Evidence from existing literature suggests that microfinance presents benefits to the unbanked in society (Alhassan et al., 2022; Malhotra, 2018; Mushtaq & Bruneau, 2019). For instance, Hussaini and Chibuzo (2018) have shown that microfinance is the most visible innovative policy for poverty reduction and financial inclusion in developing countries (Hussaini & Chibuzo, 2018). Besides, Ullah et al., (2020) provide evidence that the provision of microfinance does not merely reduce the occurrence of poverty but also the intensity and severity of it. Overall, several scholars (Hussain et al., 2019; Cai et al., 2020; Abdullah et al., 2021) regard microfinance, as a significant intervention for reducing poverty and achieving financial inclusion particularly in developing countries. In this regard, developing countries are increasingly looking towards microfinance as a means of decreasing poverty rates. This chapter contributes to this ongoing search by reviewing existing literature to aid our understanding of how microfinance has contributed to reducing poverty rates in developing nations. The purpose of this chapter, therefore, is to critically examine how microfinance has been used to reduce poverty rates in developing economies. Towards this goal, this chapter provides a critical review of existing literature on microfinance outcomes on reducing poverty in developing countries.