Impact of microfinance on poverty reduction: Evidence from Sri Lanka

Abstract

The discourse on impact of microfinance (MF) has been divided between those who see it as an effective and powerful tool for poverty reduction and others who are flippant of its capabilities as a cure-all panacea for development. This paper seeks to investigate the empirical evidence on the impact of MF with respect to poverty reduction. To examine the impact of MF on income-poverty, two leading Microfinance Institutions (MFIs), SANASA-Thrift and Credit Co-operative Societies (TCCSS) and Sarvodaya Economic Enterprise Development Services (Guarantee) Limited (SEEDS) in Kandy District in Sri Lanka were used in the study. Income-poverty analysis revealed that 2/3 of households, who were 'below poverty line' category before micro financing were empowered financially after micro financing started. Econometrics analysis illustrated that the variables investigated in the study namely, household income level before MF, distance to MFI, number of years the credit has been used, credit amount, level of education, credit-plus services, ownership, and market availability were statistically significant in the first regression model. However, in the second model, credit-plus services and ownership were found not significant. Statistical test of income empowerment indicated that if cumulative credit with credit-plus services is available, then the probability of empowerment is significantly higher.