Microfinance: economics and ethics

Purpose The aim of this study is to examine arguments about the economic and ethical worth of microfinance. Design/methodology/approach This study draws on the available literature to provide a balanced discussion of different views about the economic and ethical desirability of microfinancing. The discussion is reinforced by the use of secondary data (statistics) on the attributes of microfinancing and by reference to a case study in rural Pakistan. Findings Microfinancing is less virtuous than commonly portrayed. Its economic inefficiency consequences are identified, and it is found only likely to make a small contribution to economic growth. The economic efficiency criterion for moral worth (promoted by Becker and Posner) is found to be wanting. From an ethical point of view, microfinance needs to be supplemented by charity to assist the poor. The supply of Islamic microfinance has grown rapidly, but it remains absolutely quite small. It still has some way to go to overcome the ethical and economic shortcomings associated with the supply of microfinance. Supplying microfinance to vulnerable female borrowers can put them under considerable psychological stress. Possible beneficial effects of microfinance are also identified. Originality/value This study is unique because it systematically draws on recent literature and data to provide a novel and balanced review of the economic and ethical worth of microfinance.