Microfinance helps mitigate poverty by providing low-income individuals and groups, who typically do not qualify for traditional bank loans due to lack of collateral, with credit they can use to start or expand businesses, explains Forbes. Once their earnings grow, these individuals and groups can invest in education and other income-boosting activities. However, the notion that microfinance can lead to sustained poverty reduction was unproven as of 2010, reports the Brookings Institution.
Because of the vulnerability and variability of their income, poor people have to regularly save and borrow to meet their daily needs, such as buying food; the savings and credit services microfinance institutions provide are thus extremely useful in this regard, notes the Consultative Group to Assist the Poor. These services increase financial stability by smoothing out income fluctuations that the poor tend to experience.
However, despite these and other benefits of microfinance, there is no compelling evidence that the practice leads to sustained poverty reduction, according to the Brookings Institution. Part of the problem is a paucity of high-yield investment opportunities.
Despite this, demand for microfinance remains high among low-income individuals and groups, which is a sign that they find the services valuable, notes the Consultative Group to Assist the Poor. Borrowers regularly apply for new loans after repayment, which is another indication that the poor find microfinance useful.