Poverty Traps and Microfinance

A poverty trap is concerned with many possible different self-reinforcing mechanisms which cause misery to persist in a vicious circle.Microfinance is a successful financial innovation to help the poor to sort out credit exclusion, which is one of the poverty traps that prevent billions of under served, especially women, from escaping atavistic misery. Interconnected poverty traps range from misuse of natural resources (from blood diamonds to the oil curse) to conflict traps, demographic booming, being landlocked with bad neighbors or exposed to unfreedom. Other traps concern cultural backwardness, unsafe drinking and sanitation, food shortage up to starvation, illnesses or climatic shocks, causing mass migrations and unfair globalization.Microfinance, a grass-roots movement to provide credit to the neediest, can greatly help to dismantle at least some of these poverty traps, and thousands of mostly small institutions are competing in a market where demand from the poorest for financial services is potentially unlimited – while supply is not.The key idea is that if microfinance is not included in a holistic approach to solve poverty traps, its function is deemed to be useless or, even worse, potentially harmful.While the success of microfinance, often ignited by foreign aid funding, has gone beyond any expectation, enormous problems are still on the ground. The road towards what is now considered microfinance's optimal goal – maximization of outreach to the poorest, combined with financial self-sustainability – is still full of obstacles..This paper is extracted from the author's book “Poverty Traps and Microfinance: From Financial Inclusion to Sustainable Development,” Ibidem Verlag, Stuttgart, 2011, which covers a vacuum in the existing literature, considering state-of-the-art microfinance within a broader framework of sustainable and long-term socio-economic development