There has been a growing awareness among microfinance institutions that credit is certainly not transformative. Although certain people will be able to use microfinance to alter their future and build their businesses, that is not the case with the majority who receive a loan. Most are going to use it to smooth out their consumption.
Microfinance was once applauded as the world's most powerful tool for eliminating poverty. The initial microfinance boom brought many benefits. But it is now widely reported that the effects of microfinance loans on poverty, health and other social outcomes have been ‘small and inconsistent'.
Micro-credit has, however, earned its rightful place as one of the key instruments in the fight against poverty. However, the equivalent of the microfinance revolution for small and medium firms is still a long way away. Nobody has yet figured out how to do it profitably on a large scale. Changes in the business environment, such as improvements in the functioning of courts, may well make the difference.
The hard truism is that microfinance has been saddled with misplaced expectations, and we have lost a sense of its more modest, even though critical, potential. It is actually a tool in a broader development toolbox, but in certain conditions, it happens to be the most powerful tool. It will make the poor a little more resilient, but it is not the answer on its own.
What began as a microfinance group has now transformed into a small finance bank with its footprints across Indian metros.…
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