Question: “Microfinance appears to offer a win-win solution, in which both financial institutions and poor customers profit” (Morduch, 1999). Critically evaluate this statement with reference to the empirical literature. Introduction Microfinance has gained increasing significance as a tool for poverty alleviation with the year 2005 marked as the International Year of Microcredit by the United Nations. Over the years, the world has witnessed a remarkable growth in the number of institutions offering microfinance and the number of customers reached. Data reported in the Microcredit Summit campaign shows that in 2007, 3,352 institutions offered microfinance to approximately 155 million customers, 68% of whom were defined as poor customers. (Daley-Harris 2009) This represents an increase of up to 54.5% in microfinance offered to poor clients in 1997. The study also showed that the number of institutions offering microfinance increased by more than 400%. These statistics alone make a compelling argument for the impact of microfinance, but statistics don't always show the full picture. The widespread assumption is generally that microfinance is an essential tool for reducing poverty in a society. However, this assumption is based mostly on case studies and anecdotes and has not always been true. Studies conducted by Snodgrass and Sebstad in 2002 on behalf of USAID on microfinance banks in different countries showed that the impact of microfinance on borrowers' net profits varies from country to country. Another widely spread myth is that institutions offering microfinance must make profits because there must be some sort of profit for them. It is also difficult to truly measure...... middle of paper....... Journal of Development Economics, Vol. 53, 339-371• Mahajan, V. (1997) Microcredit is the answer to eradicating poverty. Microfinance Gateway.• Matthews, K and Thompson, J. (2005) The economics of banking. London: Wiley and Sons. 8-16.• Microcredit Summit (1997) 'Declaration and action plan', available at www.microcreditsummit.org/declaration.htm• Morduch, J. (1999) 'The microfinance promise', Journal of Economic Literature XXVII: 1569 -614.• Morduch, J. (2000) The microfinance schism. World Development, vol. 28, 617-629.• Ray, D. (1998) Development economics. New Jersey: Princeton University Press.• Ray, D. (1998)• Stiglitz J. and Weiss, I. (1981) Credit rationing in markets with imperfect information. American Economic Review. vol. 71, 3, 393-410.• The Economist (2005) The hidden wealth of the poor. Paper edition.• www.themix.org