The Impact of Microfinance

July, 2003     Monique Cohen, Deena Burjorjee

Donors want to ensure a social return on their investment. In the case of microfinance, donors must judge whether providing the poor with access to financial services yields a sufficient social return compared to alternative poverty alleviation efforts.

The good news is that impact assessments have demonstrated that financial services for the poor improve people’s lives by increasing their incomes and improving their capacity to pay for social services. However, although microfinance is an important catalyst for poverty reduction, it is not a magic bullet. The climb out of poverty tends to be slow and uneven. Donor funding for microfinance needs to complement, not substitute for, investments in core services like health, education, and infrastructure.