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Is microfinance an effective way to alleviate poverty?

By Opportunity International Australia

Tackling global poverty can sometimes seem like an insurmountable task. Decades of progress on poverty stalled in 2020 – when poverty rose due to the disruption caused by the COVID-19 crisis combined with the effects of conflict, cost of living pressures, and climate change. The World Bank estimates that globally 75 million to 95 million people were pushed into extreme poverty in 2022.

Our efforts to end poverty have faced the greatest challenge in a generation, so how can we best support those living in poverty to rebuild and craft a better path for the next generation?

A new study finds that small loans for women and families experiencing poverty are an effective tool for:

  • increasing quality of life
  • improving income and household outcomes
  • and reaching families without other alternatives for capital.

The 2023 MFI Index, conducted by 60 Decibels, found that 94 per cent of Opportunity International Australia’s microfinance clients in Asia reported improved quality of life, thanks to the small loans. A total of 1,947 small loan clients from seven of Opportunity’s microfinance partners were surveyed in India and Indonesia, between November 2022 to June 2023.

Women in a loan group in IndiaA small loan group meets in Bihar, India

Nine out of 10 of the microfinance clients surveyed reported increased income and being better able to manage their finances. Three-quarters have increased their savings – making them more resilient to any future economic shocks and reducing the risk that they will fall back into poverty. “My business is thriving,” said one microfinance client from Indonesia who participated in the survey. “I have extra capital for my business. Thus, I can save more money. I plan to use the saving for my kids' education. I have more money to spend for my family.”

Empowering women through financial inclusion

Financial inclusion is one of the most powerful tools to empower women, especially in communities where formal employment opportunities are limited, and cultural norms mean women often don't work outside of the home. For instance, in India, just 19 per cent of women participate in the paid labour force, compared to 70 per cent for men1.

Among the women surveyed, 88 per cent reported increased confidence after taking out a loan. Sixty-four per cent of women also reported that they had greater financial decision-making abilities in their households – showing that women are becoming more financially empowered.

Household outcomes also improved for the majority taking part in the survey. Sixty-nine per cent can feed their families more or better-quality meals as a result of taking out a small loan. Two-thirds are spending more on their children’s education, helping to break cycles of poverty. One respondent from Indonesia shared, “Alhamdulillah (praise god) the income from my business is increased so I can buy healthy food and can also pay for household expenses such as electricity.”

Rani, a small loan client, and her young daughterYohana from Kupang, Indonesia has grown several successful businesses and supported her children

Reaching women living in poverty with sustainable solutions

For mother of three Rani, a microfinance client of Opportunity’s local partner Cashpor (one of the organisations that participated in the survey), living in rural Bihar, India, small loans have enabled her to buy six buffalos over the years. She sells the nutritious milk, keeping some to feed to her children, and increasing her income and improving life for her family. Her years of hard work, and the ability to access finance have enabled her children to go to school, and improved health and nutrition for the whole family, giving them a brighter future. “We see ourselves as financially empowered now,” Rani says.

Access to financial services can be a challenge for rural families like Rani’s hoping to work their way out of poverty. In Indonesia, where nearly half of all adults in Indonesia still do not have a bank account, wealth inequality remains a major challenge, and many living in remote areas do not have access to financial services. Two thirds of those surveyed reported that they could not have found an alternative to the microfinance organisation to take out a loan.

Rani and her neighbours, who are small loan clientsRani (pictured left), a loan client in Bihar, India, with her young child and neighbours

Helping protect vulnerable families from future shocks

While the study results were largely positive in terms of the impact of small loans on borrowers’ lives, it also identified some challenges, that Opportunity will address with its local partners, in order to improve their services, and more effectively serve women and families living in poverty.

For instance, 33 per cent of respondents said that they would find it hard to come up with funds for an emergency expense. However, 80 per cent also said that their ability to meet this major expense had improved due to the microfinance organisation – showing the important role these organisations play by providing access to finance. Without access to small loans from a microfinance lender, those living in poverty often must resort to borrowing funds from informal money lenders with predatory practices in an emergency.

“We used to borrow small amount of money to buy fertilisers for our farm for high interests,” said one respondent from India. “We later realised that we are paying everything we earn as a loan. We then took loan from (Opportunity’s local partner) Pahal. After repaying loan, we could still save some amount of money and use it for our children's education.”

This is the second year of the study, conducted by 60 Decibels using lean data surveys. The full results from the global study, along with benchmarking data for the microfinance industry, were released on 3 October 2023, as part of the 60 Decibels Microfinance Index.

Download the full results from Opportunity's Asia microfinance partners in 60 Decibels 2023 MFI Index.


1 World Economic Forum, Global Gender Gap Report 2022 gap-report-2022

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