Microfinance and Poverty:
Questioning Conventional Wisdom

Hege Gulli

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Book Cover - Microfinance and PovertyAre all microentrepreneurs poor? Is the lack of access to credit the biggest constraint facing microenterprises? Do high interest rates charged by microlenders stunt these firms' growth? These questions and others testing frequent assumptions about microlending were tackled by Norwegian economist Hege Gulli in her recent book "Microfinance and Poverty: Questioning Common Beliefs."

"Microfinance should be seen as the provision of small-scale financial services to businesses and households traditionally kept outside the financial system rather than the more narrow view of microfinance as services for poor microenterprise owners," Gulli argued in her paper.

Take, for instance, the idea that microentrepreneurs are poor and in need of assistance. A recent IDB study of the poverty profile of people working in urban microenterprises in six Latin American countries indicates that not all microentrepreneurs are living on the edge of poverty. In fact, such tiny businesses include firms ranging from survival tactics to highly sophisticated entrepreneurial activities, Gulli writes. As such, urban microenterprise development programs may need to make a special effort to target the poor. At the same time, many microenterprises are dynamic businesses with considerable growth potential.

Executive Summary

Part I. Microfinance and Poverty: Main Issues

Part II. Common Assumptions about Microentrepreneurs and Microfinance Institutions (MFIs)
Assumption 1: Most microentrepreneurs are poor.
Assumption 2: The most serious obstacle facing microentrepreneurs is lack of access to credit.
Assumption 3: The main objective of most microfinance institutions is poverty reduction

Part III. Common Assumptions about the Outreach of Microfinance Institutions
Assumption 4: The poorest microentrepreneurs are reached by NGOs that apply the solidarity group methodology
Assumption 5: MFIs face a trade-off between reaching the poor and achieving financial sustainability
Assumption 6: Rural and poor areas remain underserved by MFIs
Assumption 7: MFIs must specifically target the poorest people and areas
Assumption 8: MFIs working with poor people in rural areas merit subsides
Part IV. Common Assumptions about the Impact of Microfinance
Assumption 9: Microcredit programs improve the livelihoods of the poor
Assumption 10: For people below the poverty line, microcredit has a lower impact on income
Assumption 11: The best indicator of the impact of microfinance is a change in clientsL income
Assumption 12: MFIs need to target the manufacturing sector to have an impact on the microenterprise sector
Assumption 13: The high interest rates charged by MFIs inhibit growth of microenterprises
Assumption 14: Savings is more effective than credit in reducing poverty
Assumption 15: Microfinance needs to be integrated with other development services to have an impact on poverty and business growth
Part V. Conclusions and Recommendations
Annex 1: Contacts and Resources on Microfinance and Poverty
Annex 2: Supporting Data

Inter-American Development Bank
Paperback - 126 pages, December 1, 1998 / ISBN: 1886938458 (USD 14.95)

Contact Address
Inter-American Development Bank
1300 New York Avenue N.W.,
Washington, D.C., 20577, USA

Hari Srinivas - hsrinivas@gdrc.org
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