Is Microfinance an Effective Antipoverty Intervention Tool for Poverty Eradication? Impact Analysis Approach

Abstract

This study examines whether microfinance is an effective poverty-reduction intervention tool and the link between access to microfinance and poverty reduction in northern Ethiopia. The study tests the hypothesis that access to/ or participation in microfinance eradicates poverty reduction and /or improving the living standards of the poorest population are positively related. Key questions we attempted to answer in this study are: Is microfinance an effective anti-poverty program intervention tool to obliterate poverty? Do the living standards of microfinance clients improve and become less poor after they get the microfinance service/they borrow the money and have access to micro-credits? Whether microfinance stimulated the poor to develop enterprises and contributed significantly to alleviating poverty?

In this study, we used propensity score matching to estimate the impact of microfinance unidimensional poverty indicators on approximately 400 Ethiopian households randomly selected from four tibias. Estimation results reveal that DECSI has a significant (at 1% level of significance) impact on school-age children expenditure on education materials in the radius and stratified matching methods.

Likewise, MFIs have significant (at a 10% level of significance) impact on households’ productive and fixed assets (with and without the house) in the nearest neighbour matching method; household assets in the stratified and nearest neighbour matching methods at (10% and 5% level of significance). Equally important, we find MFIs to have a significant effect on household expenditure on food, non-food items and poverty severity in the stratified matching method at 5% level of significance.

In conclusion, our view is that microfinance keeps borrowers from even greater catastrophes, but only rarely does it enable them to climb out of poverty? However, we should not consider micro-credit as a panacea to all multiple overlapping deprivation and poverty experienced by poor people. Even though microfinance helps the poor to tread water and just keeps them from drowning; However, we should not expect micro-credit alone to help get the poor out of poverty.

Keywords: Micro-finance, poverty, impact analysis, propensity score matching, productive and fixed assets

JEL Classification: G2, G20, G21, G23