Microfinance : does it affect rural poverty reduction? : the case of two villages in southern India

Abstract

Given that microfinance requires regular financial contributions either as savings or repayments, examining who has access to microfinance is a critical first step in understanding how microfinance influences rural poverty reduction. This paper argues that while microfinance may facilitate livelihood diversification, what microfinance is used for and to what effect would depend on a household's existing endowments, assets and capabilities as well as the political economy of the community. If used to build assets, microfinance may, over time, lead to increased endowments and reduce poverty. However, this study shows that microfinance does not exist in isolation: taking into account structural, institutional and other influencing factors that affect people's livelihoods is important to understand the dynamics of microfinance in a rural setting. Based on the case of two villages in southern India, this study shows that microfinance does not challenge the social relations of production.