Poverty Alleviation Through Financial Practices: The Importance of Microfinance

Abstract

Unfortunately, poverty is still a largely unsolved problem in many societies, especially in developing countries. Therefore, it is crucial to analyze and determine possible measures to improve the well-being of the poor and thus diminish social marginalization. Microcredit was once discovered to be the long-desired development tool, which should eradicate poverty, but during the last 40 years it increasingly transformed into a profitable business with the poor. Therefore, the purpose of this chapter is to establish a framework, to understand the benefits of all the stakeholders involved and provide a guide for institutions to similarly achieve social and financial goals by clearly defining the structures of a successful microfinance program. Based on past investigations on the achievements, shortcomings, and challenges of microfinance programs, this chapter sought to define the central stakeholders in a program, their goals and possibilities for action with the purpose to develop a theoretical model, which can serve as a basis for the analysis of microfinance programs. The result is a model for the microfinance industry, which includes a set of influencing factors that should be considered and actions that can be taken by financial institutions, clients, donors and creditors, the government, or regulatory entities. It serves as a theoretical proposal for the microfinance industry and aims to provide a guide to follow for the key players to create economic and social value. Ideally, this would improve the performance of the respective program by encouraging the reconsideration of roles and responsibilities evoked by a global view on its shortcomings. In this way, the framework can be considered as a first step in counteracting the pervasive mission drift of microfinance.