Does microfinance reduce poverty?

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Benel D. Lagua

Benel D. Lagua

My DBP colleague Angelito B. Acupan wrote a paper on microfinance and poverty reduction for his Master of Philosophy in Economics degree at the University of Newcastle, Australia. This is one of the few new studies that provide a rigorous estimate of the impact of microfinance in the Philippines. The topic is both informative and timely—particularly from a policy standpoint—and I have requested that Litoto share through this column his key findings with our readers.

Research context and intervention details
For this study, the University of Newcastle partnered with Cantilan Bank, Inc. (CBI), one of the major rural banks in the country operating mostly in Mindanao. The study employed a mixed method approach. For the quantitative analysis, a random sampling of eligible client and non-client households was undertaken in the pre-identified Cantilan Bank operational areas. The borrowers sampled represent the majority of microfinance borrowers as they lack the credit history needed for borrowing from formal financial institutions. For the qualitative analysis, the study employed participatory group discussions of microfinance clients and interviewed key microfinance industry stakeholders.

The average’ CBI microfinance client
A typical CBI microfinance client is a 47-year old married woman, living in a male-headed household with her three children. She has secondary education. Her decision to take a loan for her household’s food and daily needs is supported by her husband.

Her husband works in a farm from which they source their income. She lives in a family-owned house situated five kilometer from the town center. The house is made of light materials—thatched roof and walls and flooring made from bamboo or wood. The house has electricity and access to safe drinking water and improved toilet facilities. For cooking she uses charcoal or wood.


Results and Policy Lessons
Equal Access to Microfinance: There is no statistically significant difference in the demographic characteristics and living standards between CBI client and non-client households. This could be an indication that CBI does not discriminate even the “very poor” as there seem to be equal access to microfinance in the study areas. Further, given that CBI is one of the top rural banks in the country, we can assume that the bank is achieving financial sustainability and depth of outreach probably through ingeniously designed microfinance products and services.

Impact on Per Capita Income: Microfinance has a positive and mildly significant impact on per capita income of client households. However, the impact was not reflected across other basic welfare indicators such as per capita savings and expenditures. The study’s findings on per capita income are consistent with results from other randomized studies on microfinance impact around the world, showing modestly positive, though not transformative, results.

Impact on Client Empowerment: Focus group participants report positive microfinance impact on their saving behavior, ability to respond to health shocks, meet the educational needs of their children and women, and decisions at the household level.

Further, access to microfinance instilled financial discipline and increased awareness on the value of credit performance and its effect on the continuous and permanent access to the formal financial sector.

A number of lessons can be drawn this study. It concludes that access to microfinance leads to a mildly significant impact on household income. That is a good starting point at least from a policy formulation perspective. Microfinance does work, albeit at a less than ideal level. What is needed, moving forward, is to innovate and further diversify the existing microfinance model to include a broader suite of financial products and services needed by the poor. Only then can we truly achieve real and lasting financial inclusion —all in the hope of making growth inclusive, participatory and transformative.

Benel D. Lagua is the executive vice president at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed here are his own and does not necessarily reflect the opinion of his office as well as FINEX.

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