The Effects of Microfinance on Income and Lifting the Poor out of Poverty: Agent-based Modeling

Abstract

Introduction: Microfinance, as a predominant poverty alleviation strategy aimed at lifting the poor out of poverty, provides financial services to impoverished individuals. This research examines the effect of microloans on the growth of individuals' income and their ability to rise above the poverty line. It also explores how changes in the duration of financial aid to Microfinance Institutions (MFIs) impact poverty alleviation. Additionally, the study investigates the effect of marketing and increased sales probability, as complementary services of microfinance, on income growth. Therefore, this research evaluates the influence of microfinance on income improvement and poverty reduction by considering two policies: changing the duration of financial aid to MFIs and increasing the probability of product sales.Methods: In MFIs, the method of resource provision, different lending conditions, and the interactions among individuals create a complex environment. The heterogeneous characteristics and behaviors of individuals, along with their interactions in a dynamic setting, lead to complex events. Agent-based modeling (ABM) helps to understand and model these complexities. ABM is a simulation approach involving autonomous, independent, decision-making agents that are interconnected and aims to investigate system-level outcomes by modeling individual behaviors. This research employs the ABM approach.Results and discussion: The simulation results indicate that the provision of microloans increases individuals' income and enables many to escape absolute poverty. This study assumes a zero-interest rate. The findings show that the resources of MFIs, based on savings and loan repayments, can increase, allowing for a growing number of loans even with a two-year donation policy. Thus, providing interest-free microloans and limiting the duration of assistance can create a sustainable microfinance system. The policy of extending financial aid from three to four years does not significantly increase income levels, as MFIs can sustain themselves through savings and repayments. However, extending the aid duration increases the number of loans, with 155, 221, and 278 loans given under the two-, three-, and four-year policies, respectively. Moreover, increasing the probability of sales from 60% to 80% results in significantly higher income and a greater number of individuals above the poverty line. Overall, the study reveals that increasing financial aid duration does not necessarily lead to higher income or poverty alleviation. Instead, marketing and boosting product sales are more effective.Conclusions: Reducing the number of aid years and utilizing the released financial resources to create markets and enhance sales probability make poverty alleviation policies more effective. In other words, using financial resources to establish guaranteed or permanent markets for MFI members generates a greater leverage effect for income growth compared to simply extending the aid duration.

Keywords

• agent-based modeling
• microfinance
• poverty alleviation
• poverty line
• savings