The Impact of Microfinance

How can donors ensure a stronger impact of microfinance?

The paper argues that donor funding for microfinance needs to complement, not substitute for, investments in core services like health, education, and infrastructure. It then presents the case of measuring impact of microfinance on the lives of the poor and whether it yields a sufficient social return (for donors) compared to alternative poverty alleviation efforts.

The paper draws indicators to measure the impact of microfinance:

  • Characteristics of financial products, such as loan terms and transaction size;
  • The asset base of clients;
  • Sustainability of institution;
  • Macroeconomic, legal, and policy environments of a country.

Further, the paper describes what measures impact of microfinance at:

  • The household level;
  • The individual level;
  • The enterprise level.

Finally, the paper suggests steps through which donors can help increase the impact of financial services for the poor:

  • Prioritize large scale outreach;
  • Invest in a range of promising financial institutions to ensure that diverse clients at many income levels are reached;
  • Promote the twin goals of sustainability and impact; monitor MFI progress against both goals;
  • Encourage market research to better understand client preferences and the constraints that prevent the poor from taking best advantage of financial services;
  • Support proactive institutions that develop delivery mechanisms and products to meet client needs.

About this Publication

By Cohen, M., Burjorjee, D. & CGAP Staff