Assessing the Effectiveness of Microfinance Programs in Poverty Reduction Using PLS-SEM

Abstract

Poverty remains a significant challenge, especially in developing countries, with over 700 million people living in extreme poverty according to the World Bank. Microfinance programs have emerged as key strategies for poverty alleviation, providing financial services to those without access to traditional banking. These programs aim to empower individuals by offering microloans, savings, and other financial services to start businesses, increase income, and improve economic well-being. However, the impact of microfinance varies across contexts, with some studies showing substantial benefits and others indicating minimal or negative effects. This study employs Partial Least Squares Structural Equation Modeling (PLS-SEM) to analyze the complex relationships influencing the success of microfinance programs in reducing poverty. Data were collected from 200 beneficiaries in rural Indonesia through questionnaires covering demographic data, latent variables, and measured variables. The study aims to identify key latent variables, analyze their relationships with poverty reduction, and provide evidence-based recommendations for improving microfinance programs. Results indicate that Access to Finance positively impacts Economic Empowerment (path coefficient = 0.715), and Service Quality also positively impacts Economic Empowerment (path coefficient = 0.692). Economic Empowerment significantly enhances Social Welfare (path coefficient = 0.988). The model shows high predictive relevance, with Q² values of 0.899 for Economic Empowerment and 0.868 for Social Welfare, and R² values of 0.829 and 0.976, respectively. Importance-Performance Map Analysis (IPMA) highlights Access to Finance and Service Quality as critical drivers of Economic Empowerment. The findings emphasize the importance of improving financial access and service quality to enhance the effectiveness of microfinance programs in poverty reduction.