Oliver Kopun

1. Introduction

In October of this year, the Grameen Bank will celebrate 40 years since its founding. Hand in hand
with that, however, it will be a celebration of the wider global movement that it started. 4
decades ago, Muhammad Yunus and his rural bank revolutionized the way we look at credit. Through
commitment and will, Mr. Yunus showed that even the poorest of the poor can benefit from access to
loans and paved the way for what we now call Micro Finance. The purpose of this literature review
is to unify the current opinions on the Micro Finance movement, as ample quantity of both critique
and praise can be found among economists.

2. Literature review

The difficulty of trying to assess any general conclusions regarding the impact of Micro Finance is
that it is hard to measure precisely (Hermes and Lensink, 2007). Unlike in a laboratory, the
researchers studying the effects of MF (Micro Finance) in the real world, often do not have better
tools available than anecdotal evidence. Countless interviews with the poor recipients of MF loans
have produced vast literature on the topic, but there is only so much one can learn from those
(Hermes and Lensink, 2007). The much-needed statistical data that could help enlighten us is hard
to come by, as both the privacy regulation of banks and the number of variables defining a person’s
benefit from MF makes research tricky. Despite this challenge, Adam et al. (2021) conclude that the
Ultra Microcredit initiative in Indonesia provides positive outcomes for the clients taking part in
the initiative. Similar results have been found by another team of researchers (Pantaleo and
Chagama, 2018) in Tanzania. Those, who take on MF loans tend to have higher monthly income than
those, who do not (Pantaleo and Chagama, 2018). In other parts of the world, the positive
conclusion has been replicated. Dupas et al. (2018) showed that in Malawi, Chile and Uganda poor
people do benefit from the access to banking services. What is more, the research illustrates that
there can be vast differences in the impact these services have depending on the country. Around
80% of the research subjects in Malawi and Uganda did not utilize a free banking account when they
were provided with one, whereas most of those in Chile, where people are generally better of, did
(Dupas et al., 2018).

Vatta (2003) suggests that one of the most effective ways of distributing micro credit is through
self-help groups (SHG). These groups are informal substitution for formal bank loans. In an SHG,
participants collect and pool thrift, which is then disbursed as micro loans back to its members.
Vatta (2003) emphasizes the aspect of women empowerment as a natural benefit of self-help groups
and the wider Micro Finance space overall. Benefits in income and employment for SHG members have
been captured by the research of Kalia and Kapila (2022) who found 82.95 % increase in income and
61.91 % increase in employment for participants joining SHGs in Punjab, India. High increase in
income was similarly found by Pawar (2016).

Critique of the Micro Finance movement and some of it practices is plentiful and very well worth
studying. Singh and Dara (2007), while maintaining a positive overall picture of MF, name
bureaucratic procedures, lack of proper legislation, corrupt practices of loan officials, political
interference as problematic aspects in need of addressing. Possible solutions include frequent
evaluations of microfinance institutions' social performance, educating and retraining bankers,
eliminating the government's exclusive control over creating official institutions, and improving
infrastructure to decrease transaction costs (Singh and Dara, 2007). Vatta (2003) concedes, that it
might be challenging to offer micro credit to non-farm economic activities. In agriculture, there
is a large enough profit margin for farmers to be able to borrow and subsequently cover their
interest payments. Other micro business endeavours might not yield sufficient profit in sufficient
time. Adam et al., too, note that the interest rate usually charged on micro credit might be too
high for some to access it. Moreover, Pantaleo and Chagama (2018) illustrate that while micro
credit loans do help rise income of recipients, it does not automatically result in a wider range
of household assets being owned. Assets in households tended to remain at the same level regardless
of whether the individuals had access to Micro Finance or not. The size of the loan matters
significantly, too, as lower impact on income and employment was found when the borrower borrowed
less (Kalia and Kapila, 2022).

3. Conclusion

To conclude this literature review, I would like to return to the beginning. It has been long 40
years since Muhammad Yunus made that critical realization in a small Bangladeshi village that poor
people, too, could be banked. Over that time Micro Finance has flourished over the world and the
space has matured substantially. Despite this progress, however, as should be apparent from the
gathered literature, there is still not a general consensus among experts on the topic. Most of
them do agree that Micro Finance can be a positive driving force for poor entrepreneurs, but there
is much debate as to what extent. Then there are critics, too, all readily available to point to
flaws in need of solving. It is the existence of this constructive critique, however, that should
excite researchers, because it means there is still much research to do and relationships to
discover.

4. Resources:

Adam, L., Soekarni, M., & Inayah, I. (2021). Indonesia’s Ultra Microcredit Programme: Financing
Micro Businesses, Empowering the Poor. Journal of Southeast Asian Economies, 38(2), 263–280.
https://www.jstor.org/stable/27041376

Dupas, P., Karlan, D., Robinson, J., & Ubfal, D. (2018). Banking the Unbanked? Evidence from Three
Countries. American Economic Journal: Applied Economics, 10(2), 257–297.
https://www.jstor.org/stable/26528389

Hermes N., & Lensink, R. (2007). Impact of Microfinance: A Critical Survey. Economic and Political
Weekly, 42(6), 462–465. http://www.jstor.org/stable/4419226

Kapila, M., & Kalia, P. (2022). Impact of microcredit on income and employment of self‐help group
members in Punjab: Does credit size matter? International Social Science Journal, 72(243), 193-208.

Pantaleo, I. M., & Chagama, A. M. (2018). Impact of Microfinance Institutions on Household Welfare
in Tanzania: Propensity Score Matching Approach. The African Review: A Journal of African Politics,
Development and International Affairs, 45(2), 168–203. http://www.jstor.org/stable/45420013

Pawar, I. A. (2016). Impact of microfinance on tribal development in Telangana. Sumedha Journal of
                 Management, 5(2), 35-45.

Singh, M., & Dara, M. (2007). DEVELOPING RURAL POOR THROUGH MICRO FINANCE : PROBLEMS AND PROSPECTS.
The Indian Journal of Political Science, 68(1), 57–63. http://www.jstor.org/stable/41858819

Vatta K. (2003). Microfinance and Poverty Alleviation. Economic and Political Weekly, 38(5),
432–433. http://www.jstor.org/stable/4413155