IE Focus | By Maria Luque, Professor at IE Business School

Microfinance has proved to be a prime tool in the fight against poverty, but it is not enough to eradicate it once and for all.

Microfinance, namely the provision of financial services for people on low incomes, has taken giant strides since the 1970s. It provided financial services for some 200 million people in 2011 according to the Microcredit Summit Campaign, and now impacts the lives of around 1 billion.

Microfinance institutions face big challenges. One such challenge is the impact of the world economic crisis which began to show in 2008, and which, according to Deutsche Bank Research, has caused a deceleration in the growth of assets, a drop in profitability, and a greater risk for portfolios. Another is the excessive focus on profit and the accelerated growth of some institutions, without the necessary institutional capacities or control.   Even so, the microfinance industry continues to grow steadily and has demonstrated that in the right conditions it is a key tool in achieving the Millennium Development Goals (MDGs).

Until recently we focused on talking about microfinance as a tool that could lift people out of extreme poverty, promote production, and empower women, all of which are development Millennium Development Goals and indispensable factors to strengthen economic and social growth in developing countries. But growth and investment in assets are not the only things that access to financial services brings.Access to capital enables low-income persons to improve their lives in different ways. They start to save, which makes them less vulnerable in terms of the crises they face on a day-to-day basis. They keep their children in school for longer to ensure they have more opportunities in the future. They attend health centers more frequently, the benefits of which include lower infant death rates or deaths due to childbirth and critical illnesses. Their food is better and therefore so is the family’s general level of nutrition. They invest in their homes, making them healthier places and they gain access to water. They even participate in community micro-credit systems, aimed at promoting sustainable economic development in their communities, which in many cases means improvements in the environment and lower delinquency rates, as well as a general improvement in the community’s infrastructure. All these changes are directly related to the MDGs.

Although microfinance, along with sector-specific institutions, is helping to achieve these aims, other players need to get involved. This takes us to the last MDG, and perhaps the most important: to develop a global partnership for development. Extreme poverty and remaining issues that the MDGs are designed to address are multidimensional problems embedded in a complex and interconnected political, economic and cultural system, which requires a big variety of focuses and players to work together to eradicate it.