Working Paper 74 - Factors Impeding the Poverty Reduction Capacity of Micro-Credit: Some Field Observations from Malawi and Ethiopia

In most African countries women tend to account for an average 51% of the population, andmake up about 65% of the rural labour force. Thus, many rural based micro-finance programmeshave attempted to address the women specific need for micro-credit. This paper analyses theeffectiveness of micro-credit as a means to reducing poverty, with particular focus on women,and demonstrates, through the critical analysis of some country-specific examples, that the useand supply of micro-credit does not always lead to a sustainable impact on household or femalepoverty reduction. Analysis of findings are done based on field data, interviews, and observationsfrom Malawi and Ethiopia.The paper has concluded that while MFIs aim to reduce poverty and empower women there isusually no clear implementation mechanism to achieve these aims. Some of the conclusions ofthe paper are: the inadequate and insufficient participation of the female clients themselves in thedesign of the programmes affects the levels of poverty reduction; the inability of certain commonlyused indicators of success/failure of micro-credit in measuring the non-quantifiable impact ofthe programmes on the clients; there are certain undesired effects of micro-credit delivery, whichmay hinder the process of poverty reduction; MFIs target women mainly due to the fact that thelending characteristics of the rural micro-credit are best suited to female clients, rather than maleclients. Moreover, the empowerment process which is assumed to occur as a result of these loans,is impeded by the micro size of the loan, the small returns from the use of the loan, and the factthat the returns themselves are still not always the major contributor to the family income ascompared to the male income. Furthermore, the paper argues that it is a misconception that anMFI always targets the ultimate poorest of the poor, the landless, the assetless, and the destitute,because, as the paper has demonstrated that for an MFI such a client profile will not ensurereturns and increase profits, and it is precisely such a beneficiary profile that is unattractive andunlikely to become a potential client. The changing policy environment, thus, puts more pressureand competition for the scarce resources between the poorest of the poor and the “not-so-poor”.This paper has highlighted the fact that since development interventions put greater focus onpromotion of, for example, export markets and international trade, and medium scale farmers andentrepreneurs, the actual micro-credit clients are not the typical ‘hand-to-mouth’ poor.Finally the paper gives broad recommendations for further research and analysis in order tostrengthen the capabilities of micro-credit for poverty reduction. Furthermore, the analysis in thispaper also provides the way-forward in the design of future micro-credit interventions for povertyreduction as well as gender and empowerment.