Challenges To Building A Sound Commercial Microfinance Industry (MFI) And Its Impact On Social And Economic Well-Being Of Families Below Poverty Line

Abstract

The distribution of microloans to low-income and otherwise economically disadvantaged people has drawn attention to microfinance as a potential solution to poverty. But in emerging countries, the primary goal of these institutions has not yet materialised. Using quarterly time-series data and a Vector Error Correction Model, this research investigated microfinancing’s impact on poverty reduction. Poverty, microfinancing, small and medium-sized enterprises (SMEs), and agricultural development are shown to be significantly related in the long term. Researchers discovered that, in the long term, microfinancing actually made people poorer. Long-term poverty reduction was shown to be facilitated by SMEs and agricultural growth. Regression analysis shows that in the near term, expansion of small and medium-sized enterprises (SMEs) reduces poverty, and expansion of microfinance loans in response to poverty. Microfinance institutions are expanding as a result of rising poverty rates, while small and medium-sized enterprises (SMEs) are expanding as a means of reducing poverty. This shows that, if left unchecked, microfinancing may push poverty levels to unsavoury levels. According to the results, microfinance loans are not being used effectively, despite their rapid expansion. These results highlight the fact that providing finances is not the only important factor.