Nikhil Degala is currently a student at the American High School Diploma at North Cedar Academy, USA. With a deep interest in economics and social impact, he is particularly focused on understanding poverty and evaluating the effectiveness of poverty alleviation tools like microfinance.
The Promise
Microfinance has long been touted as the ‘silver bullet’ in global development circles, promising to uplift the world’s poor(UNCTAD, 2011).
“If you go out into the real world, you cannot miss seeing that the poor are poor not because they are untrained or illiterate but because they cannot retain the returns of their labor. They have no control over capital, and it is the ability to control capital that gives people the power to rise out of poverty.”
― Muhammad Yunus, Banker to the Poor: Micro-Lending and the Battle Against World Poverty
Initially designed to help the poorest access financial services without collateral, Microfinance aimed to alleviate poverty through debt. The poor were expected to use the debt to create self-employment and income-generating opportunities that could help them escape poverty (Yunus, 1999).
Global expansion and Belief
This neoliberal approach to poverty spread worldwide like wildfire because it doesn’t ask you to wait for some slow-moving government action to save you, but gives you a way to become your own hero (UNCTAD, 2011; Banerjee & Duflo, 2011). By 2010, India alone had over 30 million microfinance clients across 70,000 villages (Microfinance India: State of the Sector Report 2009).
Microfinance became the “go-to tool” for development agencies after the retreat of the welfare state in the 1980s and 90s. International organizations such as the World Bank, the IMF, CGAP, and major philanthropies (like Gates, Ford, Rockefeller) have actively pushed microfinance as a way to “empower the poor.”
The Early Wins: Impact — or Illusion?
At first, it seemed to be working pretty good as well. For example, Grameen Bank, by the Nobel laureate Mohammed Yunus, reported loan repayment rates above 96%, and claimed that over 50% of its borrowers had crossed the poverty line (Grameen Bank Annual Report, 2009).
Everything seemed sunshine and rainbows: the poor got safe collateral-free loans for lower interest rates from MFIs, decreasing the dependence on exploitative local loan sharks; MFIs got their loans paid back, and it is profitable—also opened for-profit MFIs up to huge untouched markets to profit (Bateman, 2010); and, developmental authorities celebrated the impact, because poverty now is self-solving (UNCTAD, 2011).
Poverty as a Credit Problem?
All this rests on the idea that the poor can become successful micro-entrepreneurs and improve their life on their own, if they are given the capital. Or as put in better words by Bono, an Irish humanitarian activist:
“Give a man a fish, and he’ll eat for a day. Give a woman microcredit, and she, her husband, her children, and her extended family will eat for a lifetime.”
This reduces poverty to a mere credit problem, which is definitely far from the truth (Bateman, 2010). Cracks began precisely here– in the dangerous oversimplification of poverty.
Capital Infiltration
The aggressive global scaling of microcredit has attracted a new poisoned chalice: Private Capital. IPOs, private equity, and global investors discovered an unsullied treasure in the rags of the poor(Bateman, 2010).
It resulted in drastic changes and effects on the MFIs and their mission.
[which will be discussed later in the blog]
“Microfinance today is about making large sums of money for the providers of microfinance, and not about resolving the poverty situation of the poor recipients” — Milford Bateman, author of Why Doesn’t Microfinance Work?
When did it break?
The Andhra Pradesh Crisis, India (2010) — caused by the rapid growth of private MFIs that led to over-lending, high interest rates (24–36%), and abusive recovery methods.
Bosnia-Herzegovina Crisis (2008–2009) — caused by the over-lending post-conflict, lack of new income, and the credit bubble burst.
Nicaragua – No Pago Movement (2008) — caused by the protests for high interest rates, abusive lending, and political pressures.
Cambodia – Debt Trap Allegations (2018–2025) — caused by overindebtedness and diplomatic debt trap
Microcredit, Macro Trauma
In fact, the best microfinance can do is not do any harm. However, most of the time this is not the case. Beyond the financial risks, most borrowers also experience emotional and gendered violence. Loan recovery agents who visit borrowers’ homes to collect weekly installments often use threats, shame tactics, and abuse, especially against women(Ghosh, 2013; Mader, 2013). Even 200+ suicides during the Andhra Pradesh 2010 crisis were linked to MFI pressures (CGAP, 2010).
Is microfinance really standing up to its hype? Why is Microfinance going wrong? If microfinance is not the answer, then what else is, and will it be enough?
Financialising Poverty
The massive MFI boom has resulted in financializing poverty, fueling the rise of for-profit, massive-scale microfinance companies. It has suddenly opened the untouched markets of the poor to modern capitalism, another market to make profits for the investors. The MFIs’ chase for profits has, in turn, actually made the lives of the poor even worse. These companies had targets to be met and a huge pressure on them to do so from the investors.
When Mission Drifts
The measure of performance, now, is more about recovery rates and loans taken and less about the impact on poverty and empowerment (Kaustav K,2017). These institutions saturated the same communities with multiple loans to the same household by luring the poor in with deceptive financial products that will eventually ramp up the interest rates, making it impossible for the poor to pay (Panda & Atibudhi, 2011).
Overindebtedness among the borrowers
In a field study conducted in rural Tamil Nadu, 45% of surveyed households had two or more loans, and 25% had three or more loans from multiple MFIs simultaneously (Kannan, 1999). Additionally, 15% of borrowers in Bangladesh borrowed from multiple MFIs at once (Ghosh,2013). In some cases, some households had to borrow from the moneylenders to pay the weekly installments of the MFIs, something that MFIs are originally designed to replace the moneylenders. MFIs wanted to hyper-profit from the poor, exploiting them (Kaustav, 2017).
Over-indebtedness grew to a point where the households couldn’t stop taking loans to repay the existing ones, resulting in a debt spiral (Panda & Atibudhi, 2011).
Credit for Survival, Not Growth
According to Abhijit Banerjee, only 1 in 5 households use it for income generation (Banerjee, Duflo et al., 2015 – The Miracle of Microfinance?). The rest use it for consumption purposes like festivals, marriages, illness treatment, and purchasing durables (Bateman,2010). Especially as the majority of the loans taken are used for consumption and for income buffering, only very few borrowers use them for productive income generation. Unfortunately, even from those few businesses that started, very few actually sustain due to a lack of proper support systems (Bateman, 2010).
RCTs Expose the Myth
Microcredit doesn’t necessarily reduce poverty, as it doesn’t actually create any income generation opportunities, so the poor are still trapped in their volatile income patterns that they need to borrow to survive.
In fact, according to the influential Miracle of Microfinance? Study (Banerjee, Duflo et al., 2015), Microfinance borrowers show no direct increase in income, total household consumption, years of schooling, health, and women’s empowerment.
When Impact Evidence Is Compromised
It is very natural and logical of you to question,‘ If Microfinance is really like this, why is nobody raising their voice ?’, and what about the research on it? The truth is that the third-party research that these MFIs use to show the ‘impact’ that they had is funded by the institution itself. According to a researcher I have interviewed, most often the researchers are pressured to show a positive impact, and if they find no impact, they have to downplay it and are told to reframe the question (Duvendack et al., 2011).
“We’re producing reports that poor people are being empowered while they’re skipping meals to repay the loans” (Researcher 1, personal communication, 27 June 2025).
These critical voices were being silenced to protect the myth. However, the truth is coming to light as the backlash is growing increasingly.
The most celebrated poverty alleviation method does not prove to be that alleviating. So what now?
Why Do the Poor Still Need Credit?
The ability to have unfussy and quick access to small cash for the poor is paramount. It allows them to immediately purchase basic life necessities despite their volatile income. That is precisely where microfinance becomes irresistible, despite its pitfalls.
While we work towards long-term sustainable solutions to poverty, ruling out MFIs leaves us a pressing question: What can immediately step in to meet these urgent credit needs of the poor, especially for consumption smoothing?
The Alternatives
Let’s look at more credit options that can immediately replace Microfinance Institutions, without the profit chase, exploitation, and toxic pressures of commercial MFIs.
Community-based credit options like credit unions and SHGs are far less exploitative and far more uplifting.
“Credit Unions are community-based, saver-owned savings and loans institutions that have the potential to answer all the consumption credit needs of the community without engaging with the microcredit sector or the local moneylender.”
— UNCTAD report: From Panacea to “Anti‑Development” Intervention: The Rise and Fall of Microcredit
For instance, Credit unions are not-for-profit, member-owner local financial co-operatives that pool funds to provide financial services to each other in the group. All the decisions, like who the loan should be given to and interest rates, are collectively taken, keeping the process more democratic. Their regular meetings also build consistency in savings. Credit unions in India, supported by state cooperative laws, have mobilized savings of over ₹1.4 lakh crore and provided loans at rates as low as 7–10% annually, significantly lower than MFI rates of 24–36% (NABARD, 2023).
Likewise, SHGs (Self-Help Groups) also significantly increase financial inclusion, promote saving habits and teamwork, and with the bank linkage, it also gives the members access to formal credit. SHGs in India have achieved repayment rates above 95%, with over 1.2 crore groups serving 14 crore households by 2023 (NABARD, 2023).
What Makes Them Better Than MFIs?
Both of them can act as effective alternatives to MFIs, addressing MFIs’ major drawbacks like indebtedness, flexibility, and abusive collective practices while also giving the borrowers the benefits of MFIs like quick access and inclusion, offering the best of both worlds.
They allow borrowers to access small loans for daily needs. But unlike MFIs, collective liability and peer pressure discourage reckless borrowing.
A study by Panda & Atibudhi(2011) confirms that over-borrowing is less prevalent in SHGs than MFI-linked groups. One of the reasons is that SHGs 6-month mandate for mandatory saving, which builds financial discipline. Supporting this, in the year 2022-23, SHGs nationwide have mobilized savings of over ₹47,240 crores (NABARD,2023-24).
The loan approvals are also fairly quick because of the local decision-making. They also tend to be more responsive and flexible to the hard realities of the borrowers.
SHG members also report significantly higher levels of satisfaction than MFI borrowers, due to no abusive recovery methods or shaming and collective empowerment (Pattanaik, B.K.,2007). A survey in Odisha found 85% of SHG members reported improved financial stability compared to 60% of MFI borrowers, attributed to lower interest rates and community support (Pattanaik, 2007).
Scaling credit unions and SHGs to a national or global level is feasible—Kerala’s Kudumbashree covers 4.5 million households—but requires robust state oversight to prevent mission drift and ensure equitable access (CESS, 2021). The need for continuous government funding may strain public budgets (Nair & Krishnakumar, 2014).
But Can They End Poverty? Probably Not.
These credit options deserve much more institutional push than MFIs did. These community-based credit options are definitely a more humane, empowering, and sustainable way of solving the immediate needs of the poor.
However, we are not to confuse financial security with financial upliftment. All it does is provide the poor with a safer way to address their quick needs. It does help the poor a lot to be more stable, but very little in growing.
Thinking that just an alternative way of credit will solve poverty is like thinking getting better shoes will help you reach your destination. Safer shoes can help you walk further, but without a path, there’s no destination.
The Missing Path
Microfinance or the community credit models — SHGs and credit unions— can not actually carve the path that the poor can use to walk out of poverty. These credit options for the poor do very less in addressing the core issue.
An illiterate rural woman had to borrow from an MFI for her husband’s illness and absence of income, as the nearest free clinic is unequipped, and the private hospital demanded exorbitant fees.
The loan repayments made them cut back on food, and her child is not fed well, and necessary nutrients are not given, stunting her growth. There was no one to educate the mother.
By the time the daughter is ten, poor nutrition turned to poor health, making her frequently miss school. However, when she did go, there was no math teacher; it was a single overworked teacher reading out of a textbook that hadn’t been changed for years.
Her mother decides to shift her to a private school, the one with uniforms, and a van. It’s expensive, but she borrows from an SHG again. She thought that at least her kid should have a chance. But when the girl reached 13, it turned out she had polio. She dropped out of school and remained at home. She wanted to work and earn, but there was no accessible system that offered disabled jobs. She was cursed to poverty with no way out.
Poverty Is A System
Poverty is not solved with better access to money. Credit should not be misunderstood as empowerment. The very poor often lack the assets and skills to run an enterprise (Banerjee & Duflo, 2011). Giving them credit won’t do any magic; it just adds to their comfort, like better shoes. However, poverty is only solved when the path is created.
It starts from realising that poverty is a multidimensional structural problem and not a simple individual one.
Additionally, it requires more comprehensive, robust, and collective solutions that touch the lives of the poor in many aspects— health, education, and social safety nets — than just providing them liquidity.
Access to credit is not access to opportunity when the system is rigged. When there is no land to till, no jobs to take, no doctor to visit, and no school to send your child to — a ₹20,000 loan doesn’t change much. At best, it postpones a crisis. At worst, it pushes you deeper into one.
Don’t Blame Them
Also, it is very often the case that the poor are blamed for their poverty, or in other words, “they chose to be.” However, the poor are not irrational; they just don’t have a choice.
“The poor are no less rational than anyone else — quite the contrary. Precisely because they have so little, we often find them putting much careful thought into their choices…”
—Banerjee & Duflo (2011), Poor Economics
Building A Path: Vietnam’s Case
In the 1990s, Vietnam was a post-war economy with high poverty levels, low literacy, and weak infrastructure, and was one of the poorest nations of the time. However, poverty dropped from 58% in 1993 to 3% in 2015 (Thanh Binh, P. T., & Ha, V. V.,2018), a miracle that developing countries dream of. While the rest of the world sang the songs of Microfinance, Vietnam, however, has a different playbook—State-led development.
Vietnam’s government took it upon itself to reduce poverty—it took the responsibility. Some of the major tools they have used are multi-sector interventions, administrative reform, and decentralised development.
One of the main reasons Vietnam’s approach was a massive success is that it is structural in nature. It made agrarian reforms, launched public employment reforms, made huge investments in public education and public health, and developed infrastructures like building roads, electricity, and irrigation systems.
Providing state-backed financial services is another crucial step for their success, eliminating the dominance of MFIs.
The Vietnam Bank for Social Policies (VBSP), a state-run development bank, offered subsidized loans targeted at poor and near-poor households. These loans are aligned with the broader scheme, often becoming a small tool in other livelihood schemes and targeted programs. Hulme & Mosley (1996), in Finance Against Poverty, conclude that credit’s effectiveness in reducing poverty depends crucially on the environment in which it is provided. The state’s role in creating this enabling environment through legal frameworks like land reform laws and subsidies for VBSP loans with minimal interest rates is critical. Moreover, state oversight also protected these initiatives from market intrusion, preventing from the commercial profit-chase.
Vietnam’s approach has successfully shown us what any MFI could not since their creation, proving that a multidimensional structural approach is necessary to reduce poverty. This is the kind of path that countries and international institutions should carve: A path that is more equitable, empowering, sustainable, and collective.
Kerala’s Kudumbhashree
Kerala’s Kudumbhashree is also another successful case of structural and multifaceted approach to poverty eradication. According to a 2021 evaluation study by the Centre for Economic and Social Studies (CESS), commissioned by the State Planning Board, Kudumbashree has contributed to reducing rural poverty in Kerala to below 10%, down from 33% in the late 1990s.
Kudumbhashree is a SHG based poverty eradication and women empowerment mission, which is also integrated into the local governance. Launched in 1998,it is now one of the largest women’s movements in Asia. Its approach to poverty is mainly 3 types—economic, social, and women empowerment.
Economic development consists of financial inclusion through thrift and credit and bank linkage, and income generation opportunities like collective farming, micro-enterprises and livestock.These NHGs collectively hold over ₹9,369 crore in bank deposits, and have disbursed ₹28,723.89 crore in internal loans to members (LSG Kerala).Through NHG-bank linkages, Kudumbashree arranges low-cost loans—nominally at 7%, subsidised to around 4%—helping women avoid MFIs and high-interest informal lenders. This scheme has played a central role in reducing dependence on exploitative moneylenders and escaping debt traps(Dr. Biju S.K. & Dr. J.B. Rajan (2019)).
Social development of initiatives of awareness and upliftment for the extreme poor and mentally challenged.As of 2023, 154 Buds Schools and 81 Buds Rehabilitation Centres are run by Kudumbashree in Kerala.These provide education and therapy to intellectually disabled children and adults, free of cost.Through the Ashraya project, Kudumbashree identified over 1.6 lakh destitute persons across Kerala and built rehabilitation plans for families ( Kudumbashree, Annual report 2022-23).
Women empowerment, the most crucial part of all, including gender self learning, helps the women develop a collective consciousness on gender and a deep understanding of its pervasive expressions ,as said in the Kudumbhashree story. Participation in Kudumbashree significantly increased women’s role in household decisions — from 36% to 62% over a three-year period(Devika & Thampi (2007)).
Additionally, “Kudumbashree functions as a linkage between the local body, the schemes or government, and the common people.”, says Ranjani, the District Co-ordinator of Kudumbashree. It also becomes the channel for the women’s voice to be a part of the planning at panchayat Raj. By embedding Kudumbashree within the state structures, Kerala ensured smooth co-ordination within their economic, social, and empowerment initiatives, making it key to addressing the multi-dimensional nature of poverty.
Kerala’s approach is one of the prime examples of how structural programs like this can bring change on such a wide scale. This grass roots movement has transformed the women’s role in Kerala into a more confident , connected and more vocal one. Empowering the women in the poor households led to the whole development of the family and eventually got them out of poverty.
Conclusion
This article is on Microfinance and poverty with a critical lens discussing MFIs’ inherent flaws, their alternatives, and their inefficiency, and what can be a real solution to reduce poverty.
This article has raised flags about the serious issues of Microfinance and also aimed to provide a view that will better reduce poverty.
Firstly, it critiques microfinance institutions on their commercialised, exploitative nature that has kept them far from what they are supposed to stand for. It tends to profit the poor by turning them into investment opportunities, causing a rise in overindulgence (Bateman, 2010).
Further, abusive repayment techniques were used by the loan agents. It also mentions how the existing research is often biased to cover up the myth that Microfinance is a dead movement that has shown no impact on poverty (Duvendack et al., 2011).
It then went on to explore why the poor still need quick cash to smooth their day-to-day consumption. It argued for better immediate community-based credit alternatives like Credit union and SHGs and their limitations. While these options can be better than MFIs, they do very less in directly reducing poverty (Pattanaik, 2007). It highlights the paramount need for a transition to more structural and comprehensive state-led development, underscoring the significance of understanding the complex and tricky nature of poverty that needs more than mere credit to be reduced. Also, showed the drastic effects of a lack of structural solutions to poverty. Lastly, it explored Vietnam and Kerala’s case and discussed what should be learnt from and applied. I very much believe that embracing a structural and multidimensional—rather than superficial one-size-fits-all financial fixes— approach towards poverty is the only way to tackle it.
Bibliography
- Banerjee, A. V., Duflo, E., Glennerster, R., & Kinnan, C. (2015). The miracle of microfinance? Evidence from a randomized evaluation. American Economic Journal: Applied Economics, 7(1), 22–53.
- Banerjee, A. V., & Duflo, E. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. Public Affairs.
- Bateman, M. (2010). Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism. Zed Books.
- CGAP. (2010). Andhra Pradesh 2010: Global Implications of the Crisis in Indian Microfinance. Focus Note. Available at https://www.cgap.org/sites/default/files/CGAP-Focus-Note-Andhra-Pradesh-2010-Global-Implications-of-the-Crisis-in-Indian-Microfinance-Nov-2010.pdf.
- Devika, J., & Thampi, B. V. (2007). Between Empowerment and Liberation: The Kudumbashree Initiative in Kerala. Indian Journal of Gender Studies, 14(1), 33–60.
- Duvendack, M., Palmer-Jones, R., Copestake, J. G., Hooper, L., Loke, Y., & Rao, N. (2011). What is the evidence of the impact of microfinance on the well-being of poor people? EPPI-Centre, Social Science Research Unit, Institute of Education, University of London.
- Ghosh, J. (2013). Microfinance and the challenge of financial inclusion for development. Cambridge Journal of Economics, 37(6), 1203–1219.
- Hulme, D., & Mosley, P. (1996). Finance Against Poverty (Vols. 1 & 2). Routledge.
- Kannan, K. P. (1999). Poverty Alleviation as Advancing Basic Capabilities: Kerala’s Achievements Compared. Centre for Development Studies.
- Mader, P. (2013). Rise and Fall of Microfinance in India: The Andhra Pradesh Crisis in Perspective. Strategic Change, 22(1–2), 47–66.
- Panda, D. K., & Atibudhi, H. N. (2011). Over-borrowing and Microfinance: Are SHGs Better Off? Journal of Microfinance and Rural Development, 2(1), 45–56.
- Pattanaik, B. K. (2007). Performance and Impact of Self Help Groups in India. Kurukshetra, 56(1), 26–31.
- Rajan, J. B., & Biju, S. K. (2019). Government Machineries Are Inept to Battle with the Tactics of Money Lenders: A Study About the Private Micro Finance in Kerala. International Journal of Management, 10(6), Nov–Dec 2019.
Institutional and Policy Reports:
- CESS. (2021). Evaluation Study of Kudumbashree. Centre for Economic and Social Studies, commissioned by the State Planning Board, Kerala.
- Kudumbashree. (2023). Annual Report 2022–23. Kudumbashree State Mission, Government of Kerala.
- LSGD Kerala. (2024). Financial Inclusion and Performance Metrics of Kudumbashree NHGs. Local Self Government Department, Government of Kerala.
- NABARD. (2023). Annual Report 2022–23. National Bank for Agriculture and Rural Development.
- Microfinance India. (2009). State of the Sector Report 2009. SAGE Publications.
- Grameen Bank. (2009). Annual Report 2009. Dhaka: Grameen Bank.
- UNCTAD. (2011). From Panacea to “Anti‑Development” Intervention: The Rise and Fall of Microcredit. United Nations Conference on Trade and Development.
- Nair, T. K., & Krishnakumar, A. (2014). Poverty Reduction through Social Mobilization: The Kerala Experience. International Labour Organization (ILO).
- Thanh Binh, P. T., & Ha, V. V. (2018). Vietnam’s Poverty Reduction and Inclusive Growth Strategy: Achievements and Lessons Learned. Vietnam Academy of Social Sciences.
Other Referenced Quotes:
- Yunus, M. (1999). Banker to the Poor: Micro-Lending and the Battle Against World Poverty. PublicAffairs.
- Bono. (n.d.). Quote referenced in development discourse; source attribution widely cited in development advocacy speeches.
- Researcher 1, Interview conducted at the Centre for Socio-economic and Environmental Studies (CSES), Kochi, on 27 June 2025, 14:27 IST, with verbal consent, using a questionnaire of open-ended questions
- Ranjani, Kudumbashree District Coordinator. Quote cited from interview or media mention in Kudumbashree documentation