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Can Microfinance Be Effective

Microfinance is a tool used to try and help people out of poverty. As the name suggests, it involves very small amounts of money – as little as $25 in some cases. This money is lent to people to help them start businesses. Typically, these people are so poor they find it impossible to get credit elsewhere, they are often women and more often than not they live in rural areas.

On the face of it, microfinance is a very positive thing. When money is invested in the right places and in the right people, it can encourage enterprise and development in some of the poorest areas of the world, helping to unlock the potential of people. However, there is a flipside to it, and one argument suggests that it actually isn’t that effective at all. But which of these is true?

It might sound like something of an easy answer, but arguably both of these things are true. Microfinance has indeed turned around the lives of many people, giving them the boost they need to start a business and investing directly in individuals. The UN also views microfinance as important, citing it as one of the things that is helping in its quest to fulfil the Millennium Development Goals and alleviate poverty.

There’s another side to this, though. While many groups and organisations that distribute microfinance are excellent at what they do, there are others that can end up causing more problems than they solve. For instance, one of the arguments bought against microfinance is that the money doesn’t always reach the people it is supposed to help – rather than finding its way to very poor people who want to use it for development purposes, it ends up in the hands of people who aren’t even poor at all.

Also, without a support system of education and training for the individuals who are meant to benefit from microfinance, it is somewhat difficult to measure its true effectiveness. Often, the people who receive the money have no formal training in business and very little education. This means that despite their best efforts and the best intentions of the people lending the money, their businesses don’t always succeed and these already poor people can end up in more difficulty than they were already in.

Therefore, microfinance certainly does have the potential to be effective and lending money through reputable organisations to help the poor is certainly worthwhile. However, microfinance is not the only solution and it should not be isolated from other important indicators of development, such as education and the infrastructure necessary to help microbusinesses succeed and help people lift themselves out of poverty.

Guest post by Liz Strawford on behalf of World Vision Microloans.

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