The Welfare Impacts of Microfinance on Rural Households: Evidence from Boyolali of Indonesia

This paper examines the welfare impact of microfinance on rural hoiiseholds in four villages of Boyolali, Indonesia. It is found that access to microfinance services of formal microfinance institutions (MFIs), such as micro banks, contribute to higher levels of child education, greater confidence in dealing with others, and reducing the probability of facing household financial problems. This is the case as the disbursement of loans helps to finance education-related expenditures of children. The utilization of loans for productive purposes has the potential to increase income, leading to greater self-confidence in dealing with others. Similarly, greater incomes resulting from loans can also enhance the capability to cope with risk and vulnerability and hence, reduce the likelihood of facing financial distress. However, borrowing from moneylenders has little welfare impacts on rural households. Access to loans from moneylenders cannot reduce the probability of having financial difftculties, and failing to enhance selfconfidence in dealing with others.