Expert Commentary

Microfinance and poverty alleviation in sub-Saharan Africa

2012 scholarly literature review regarding microfinance programs and their effects in developing African countries.

Just 24% of adults living in sub-Saharan Africa have a bank account with a formal financial institution. Only the Middle East/North African region has a lower participation rate, according to World Bank data. Over the past decade, however, microfinance in the region has gained momentum, with improvements in the regulatory environment, an increase in the operational efficiency of microfinance providers and continued donor interest in supporting the sector.

Analysis of the true impact of microfinance is decidedly mixed, however. It’s also worth bearing in mind that programs may operate very differently in diverse country settings. Some researchers have found that microfinance services, including credit and savings, have done little to alleviate poverty across sub-Saharan Africa — and in some cases have even exacerbated it; but others believe that microfinance is a necessary tool in creating the kinds of microenterprises that help lift people out of poverty, especially in environments with few formal employment opportunities.

Recent research reveals a number of characteristics of microfinance that can affect its implementation across the continent, including: how the economic and social impacts of microfinance can differ by gender; the role provision of business development services can play in improving microfinance’s ability to fight poverty; and the extent to which the penetration of financial institutions is related to a country’s economic inequality.

A 2013 paper published in the Annual Review of Economics, “Microcredit Under the Microscope: What Have We Learned in the Past Two Decades, and What Do We Need to Know?” synthesizes major research in this area globally. The author, Abhijit Vinayak Banerjee of MIT, concludes that the impact of microcredit is somewhat limited:

Taking this body of work together, some patterns stand out. First, there is clear evidence that as long as the credit is reasonably priced, it leads to business creation and/or some amount of expansion…. Most studies also see an increase in ownership of consumer durables and business assets, especially if home repair and livestock ownership (both of which provide services into the future) count as durables, although the relative importance of consumer durables and business assets varies…. What is also striking is the lack of strong evidence linking this business creation to increases in consumption. Indeed, there is no evidence of large sustained consumption or income gains as a result of access to microcredit… There is also no evidence of substantial gains along other dimensions of welfare, such as education and health. At least in the one- to three-year horizon, we see no evidence of microcredit transforming the lives of its beneficiaries.

The following is a representative sample of studies investigating ways microfinance is affecting poverty alleviation and development across sub-Saharan Africa:


“The Impact of Microfinance in Sub-Saharan Africa: A Systematic Review of the Evidence”
World Development, 2012

Summary: “Microfinance is seen as a key development tool, and despite the current deepening crisis within the industry, it continues to grow in sub-Saharan Africa. We systematically reviewed the evidence of the impacts of micro-credit and micro-savings on poor people in sub-Saharan Africa. We considered impacts on income, savings, expenditure, and the accumulation of assets, as well as non-financial outcomes including health, nutrition, food security, education, child labor, women’s empowerment, housing, job creation, and social cohesion. The available evidence shows that microfinance does harm, as well as good, to the livelihoods of the poor.”


“Rethinking the Impact of Microfinance in Africa: ‘Business Change’ or Social Emancipation”
European Journal of Development Research, 2010

Abstract: “This article questions received wisdom that the benefits of microfinance start with poverty reduction and are subsequently followed by social emancipation. Taking the case of Uganda and by using a consensual people-centered relevance test to assess the impact of microfinance on poverty alleviation, microfinance is shown not to improve the well-being of microfinance clients much, with only marginal well-being gains achieved by clients. However, a subsequent (gender) power relations analysis reveals that in spite of these marginal well-being gains, women clients achieved more emancipation. The article therefore calls for a rethinking of the microfinance outreach campaign in Africa, and of the controversy between the adoption of a business or welfarist approach to microfinance, suggesting that social emancipation should be pursued in its own right rather than waiting for poverty reduction to occur first.”


“Poverty Alleviation and Microcredit in Sub-Saharan Africa”
The Clute Institute International Business & Economics Research Journal, 2009

Abstract: “This paper analyzes the incidence of extreme poverty in [sub-Saharan Africa] in relation to the socio-economic infrastructure of the region, its land tenure system, and particularly the growth of microcredit and microentrepreneurship. Using primary data, the paper analyzes the growth of microcredit which operates through 297 microfinance institutes in 34 countries of the region. Extensive use of microfinancing has shown to reduce extreme poverty among the users of microcredit. Use of microcredit at the grassroots level creates a class of microentrepreneur with characteristics similar to the model of entrepreneurship developed by Schumpeter. The study concludes that there is a prospect for the growth of microentrepreneurship in at least 13 countries of SSA allowing for new employment opportunities, savings among borrowers, and reduction of extreme poverty.”


“The Make-Buy Decision in Marketing Financial Services for Poverty Alleviation”
Journal of Financial Services Marketing, 2011

Abstract: “In this article, we suggest how poverty reduction can be achieved through alleviation measures that enable the poor to satisfy their needs by focusing on the needs of others. Instead of a direct focus on the consumption needs of the poor, we suggest an indirect approach to satisfying these needs, by providing the poor with credit and consulting services for entrepreneurial businesses that focus on the needs of buyers. Loans to the poor who lack collateral are increasingly based on group lending techniques that rely on joint liability to secure repayment, which have come to be known as microfinance. We suggest that in addition to credit, financial services for the poor must include strategic advice and assistance to select markets, and make the products (goods and services) for sale in their output markets with the financial services bought in their input markets. Financial services for the poor must include not only money to invest in a business but also consulting services to help the business succeed.”


“Microfinance, Inequality and Vulnerability: Empirical Analysis from Central African Countries”
Journal of Development and Agricultural Economics, 2011

Abstract: “This study examines the relationship of microfinance, inequality and vulnerability by providing a cross-country empirical study of 11 developing countries in Central Africa. Microfinance plays an important role in the financial market in many African countries. Although microfinance is expected to significantly affect macro variables, we lack enough empirical research on impact analysis at the macro level, such as the effect of microfinance on inequality and vulnerability. Results indicate that the number of microfinance institutions has a negative impact on the Gini index in Central African countries. When the microfinance institutions in the country become dense, inequalities decrease.”


“Microfinance and Female Empowerment: Do Institutions Matter?”
Women’s Studies International Forum, 2012

Synopsis: “Microfinance programmes increasingly target poor women in developing countries with the expectation that, besides poverty reduction, having access to microcredit advances their empowerment. However, research provides conflicting evidence and shows that empowerment may not, or may only be partially achieved. This study explores if variations in the socio-cultural, economic and microfinance organisational contexts explain why some programmes are more successful than others by comparing the results of two microfinance providers in Ethiopia. The study demonstrates that variations in formal and informal rules indeed matter for how microfinance programmes work out. The study also shows that microfinance programmes may enable women to generate extra income and improve their asset base but may also perpetuate inequalities as well as reconfirm a gender-specific division of labour.”


“Does Microfinance Reduce Rural Poverty? Evidence Based on Household Panel Data from Northern Ethiopia”
American Journal of Agricultural Economics, 2011

Abstract: “Evidence on the long-term impacts of microfinance credit is scarce. We use a unique four-round panel dataset on farm households in northern Ethiopia that had access to microfinance, observed on two key poverty indicators: household consumption and housing improvements. Fixed-effects and random trend models are used to reduce potential selection biases due to time-invariant unobserved heterogeneity and individual trends therein. Results show that borrowing indeed causally increased consumption and housing improvements. A flexible specification that takes into account repeated borrowings also suggests that borrowing has cumulative long-term effects on these outcomes, implying that short-term impact estimates may underestimate credit effects.”


“Poverty Reduction through Entrepreneurship: Microcredit, Learning and Ambivalence Among Women in Urban Tanzania”
International Journal of Educational Development, 2012

Abstract: “This article explores women’s experiences of their roles as entrepreneurs, and reflects on how the learning processes and outcomes associated with microcredit schemes ‘shape the self,’ often in quite unpredictable ways. The article is based on an ethnographic study of disadvantaged women in Dar es Salaam, and follows them as they participate in NGO-based training schemes, ‘practice’ entrepreneurship in a range of income-generating settings, and negotiate the consequences of the new subjectivities on which the independent, entrepreneurial citizen is based. Like many microcredit programmes, the majority of women in the study were full-time housewives before joining the scheme. Others had left their jobs following retrenchment, prejudice or gender discrimination. In all cases, they started their own businesses with little or no business experience or education. Whilst some appear to have embraced the new opportunities, others have struggled. In all cases, microcredit and the associated learning processes produced contradictory and ambivalent feelings of success and failure, hope and disappointment, progress and exclusion. The article explores these ambivalences in order to critique development initiatives that are based on universal notions of autonomy and self-determination in contexts shaped by dependence and structural inequality.”

Tags: Africa, research roundup

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