Microfinance doesn’t exactly help cut poverty

Microcredit was initially celebrated as a poverty-busting innovation — till, about a decade ago, randomised evaluations began taking some of the gloss off.

By: Express News Service | Updated: April 27, 2015 2:29 am

Flagging interesting research
Where Credit is Due
J-PAL and IPA Policy Bulletin, 2015   
Lead Author: Justin Loiseau

Microcredit — small loans for underserved entrepreneurs — began in Bangladesh in the 70s, expanded rapidly in the 90s and 2000s, and now serves over 200 million clients worldwide. It was initially celebrated as a poverty-busting innovation — till, about a decade ago, randomised evaluations began to add rigorous evidence to the assessment — and began taking some of the gloss off.

A new paper that summarises findings on microfinance uptake among beneficiaries in seven countries, including India, overturns broad assumptions that underpin the microfinance and self-help group movement. The randomised evaluations from four continents show that microcredit does not have a transformative impact on poverty.

However, it can give low-income households more freedom in optimising the ways in which they make money, consume, and invest, according to the evaluations.

The studies were carried out in India, Mongolia and Philippines in Asia, Bosnia-Herzegovina in Europe, Morocco and Ethiopia in Africa, and Mexico in North America.

The key results, summarised in the paper Where Credit is Due, published by the Abdul Lateef Jameel Poverty Action Lab (J-PAL) and Innovations for Poverty Action (IPA):

♦ Demand for many microcredit products was modest. In Ethiopia, India, Mexico and Morocco, take-off ranged from 13%  to 31% — far lower than predictions by partner MFIs.

♦ Expanded credit access did lead to bigger investments in most cases. All but one study showed some evidence of expanded business activity — however, these investments rarely resulted in profit increases.

♦ Microcredit access did not lead to substantial increases in income. None of the seven studies found a significant impact on the average household income for borrowers.

♦ Expanded access to credit afforded households more freedom in optimising how they earned and spent money. Six studies suggest microcredit played an important role in increasing borrowers’ freedom of choice.

♦ There is little evidence that microcredit access had a substantial effect on women’s empowerment or investment in children’s schooling. But across all seven studies, researchers did not find that microcredit had widespread harmful effects either, even with individual-liability lending, or a high interest rate.

The research in India was done by Abhijit Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan. Spandana Sphoorty Financial Ltd was the partner MFI; the borrowers were exclusively women.

For all the latest Explained News, download Indian Express App

  1. H
    Hugh Sinclair
    Apr 27, 2015 at 7:29 pm
    Perhaps the bigger question emerging from this is simply why the Indian authorities allowed such rampant lending to the poor if there was no evidence that this has a particularly transformative impact? Prior to the Andhra Pradesh crisis microlending was, for all practical purposes, un-regulated. It took a number of suicides and the collapse of the AP sector for the regulator to wake up. Why? It appears we fell in love with the IDEA of microfinance, it sounded so nice, self-help, recycling loans, harnessing entrepreneurial spirit blah blah. But we forgot to ask whether it actually works or not. And now microfinance is again growing in India, despite all this evidence. I would suggest that the ultimate blame lies not with the banks, but with the regulators that allow this mostly pointless activity to flourish. Not all microfinance is bad, as these papers point out. In fact, it is mostly merely useless. This is precisely where the regulator could have an important role - ensuring that only effective microfinance is able to grow. Is that what they are doing?