Savings, Informal Borrowing, and Microfinance

Microfinance provides an alternative source of finance to the poor and women, who, if without access to formal banks, have access to a variety of informal lenders. As microfinance is relatively cheaper than informal finance, access to microfinance is expected to reduce household borrowing from informal sources. Microfinance is also expected to increase household savings by providing an alternative facility for savings mobilization from the poor. An econometric analysis of household survey data from Bangladesh shows that micro-borrowing has indeed reduced borrowing from informal sources, thereby demonstrating microfinance as an effective alternative source of finance to the poor. Micro-borrowing is also found to increase voluntary savings, thus assuring that an appropriate facility can raise household savings even in a poor country such as Bangladesh. Of course, impacts of microfinance vary by the gender of borrowers. The savings impact of micro-borrowing is more pronounced for women than for men. In contrast, the informal finance impact is more pronounced for men than for women.