Microfinance

Microfinance has become a widely used tool to provide credit to areas and populations that traditionally lack access to conventional banking services. Originating as a poverty alleviation mechanism, microfinance has grown in scope and design as a larger means of improving financial inclusion. Despite the increase in access for new borrowers, much of the existing evidence has failed to find transformational effects on key outcomes such as profits and income. However, results are subject to significant variation across geographies, programme design and beneficiaries, and the heterogenous effects do lead to significant gains for certain populations. The incentives given to borrowers to encourage on-time repayment, the timing of repayments, and the flexibility of borrowers’ contracts all have an impact on both business outcomes and loan default rates. More recently, there is a growing body of literature looking at alternatives to loans, such as asset-based microfinance, that also show promise. Yet, as new innovations to microfinance are adapted around the world, further research is needed to explore which adaptations prove effective, in which contexts, and for whom.