Microfinance and Poverty Reduction: How Risks Associated With Government Policies Affect Whether Microfinance Alleviates Poverty in Latin-America

The expansion of financial services to the poor, now widely referred to as microfinance, quickly saw tremendous success in Bangladesh beginning in the 1970\u27s and was exported to a number of other countries. For a time microfinance was spoken of as a panacea, in part because it is more detached from governments than other forms of poverty alleviation. I develop a model based on expected utility theory that looks at how risks associated with government policies and characteristics affect whether this mechanism eases poverty. Using a large N analysis of Latin-American states from 1990-2010 and a case study analysis to examine the economic and political development of Brazil, I find that risk of political and economic instability helps explain the effects of microfinance on poverty alleviation. However, rather than stability in the political and economic system making microfinance more efficient for poverty reduction, it appears that microfinance has the greatest poverty reduction effect under conditions of instability. This may be because the type of people who borrow from microfinance institutions during higher risk times are using loans as an informal insurance mechanism, or because higher risk functions as a selection mechanism either selecting for the most lucrative uses of microfinance or selecting for people who are near or above the poverty line and not those who are well below