Microcredit as panacea? A multidimensional analysis of its role in poverty reduction

Microcredit is widely promoted to improve livelihoods, yet its impact on multidimensional poverty remains mixed. Using an Endogenous Switching Regression (ESR) model, this study evaluates the relationship between microcredit and multidimensional poverty among rural Ethiopian households. Unlike conventional cross-sectional studies, the analysis incorporates borrowers’ credit exposure to capture dynamic effects. Results show microcredit access is associated with lower Multidimensional Poverty Index (MPI) scores, with client households experiencing a 16 per cent lower MPI than non-clients. Moreover, each year of credit exposure is associated with a 4.4 per cent reduction in poverty level. However, microcredit plays a limited role in mitigating educational deprivation, particularly in adult educational attainment. Crucially, while female-headed households face higher baseline deprivation, land access reverses this gap, demonstrating that higher poverty among women is driven by entrenched gender norms restricting access to productive assets. Overall, microcredit could contribute to poverty reduction, but it is far from a panacea.