Is Microfinance a Model for Financial Inclusion of All?

The impact of microfinance on poverty has been debated widely in academic circle, and the debate has drawn strong proponents for both sides of the argument. An important reason for the ambiguity is that programme design and its impact is sensitive to programme placement and programme participation, which are endogenous. This paper examines the hypothesis of selection of good borrowers into microfinance by analysis of the characteristics of loan offered in terms of interest rates charged, depth of outreach, and an estimation of self selection of clients into microfinance programmes using a logit model. Our analysis suggests that the microfinance programmes are more efficient in terms of meeting needs of the borrowers, however their impact may be constrained by low depth of outreach as better borrowers are more likely to be selected into MFIs.