ABSTRACT Microfinance borrowers oftentimes borrow funds for purposes other than investing. Subsequently, they use that fund for non‐investment purposes. This can dodge the poverty alleviation goal of microfinance. The objective of this study is to examine this idea empirically to determine whether microfinance fails to achieve its purpose of poverty alleviation when borrowers borrow and use funds for purposes other than investment. A total of 2571 loans are analyzed and divided into classes according to borrowing purpose and subsequent fund usage using the LCA model. It is found that funds from 26% of loans are used for investment purposes, while the rest are used for some other purposes. This study argues that if the borrowing objectives are other than investment, microfinance can fail to achieve its purpose of poverty alleviation. The study recommends a better understanding of the ulterior objectives of the borrowers before making any loan, and rigorous monitoring of fund usage afterwards.
Islam et al. (Sun,) studied this question.