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Does Microcredit Deliver On Its Promises?

An official from a microfinance company talks with a borrower in Vadod, India.
An official from a microfinance company talks with a borrower in Vadod, India.

The idea behind microcredit is that if you give poor people in developing countries access to credit, the ability to borrow, they will use that money to start or expand businesses which will eventually help them pull themselves out of poverty. But ever since these programs boomed in the early 2000's, questions have been raised about how effective they are.

We wrote about the backlash against this type of lending in 2011. Back then, some early studies had found limited benefits for borrowers.

Now, the results of the longest running study on this issue have been analyzed by a couple economists we've talked to before on Planet Money, Esther Duflo and Abhijit Banerjee. Their paper on microcredit loans in Hyderabad, India suggests it might be time to "rethink" the role of microfinance.

...In contrast to the claims sometimes made by MFIs [microfinance instutions] and others, demand for microloans is far from universal. By the end of our three-year study period, only 38 percent of households borrow from an MFI, and this is among households selected based on their relatively high propensity to take up microcredit. For those who choose to borrow, while microcredit "succeeds" in leading some of them to expanding their businesses (or choose to start a female-owned business), it does not fuel an escape from poverty based on those small businesses. Monthly consumption, a good indicator of overall welfare, does not increase for those who had early access to microfinance, neither in the short run... nor, more tellingly, in the longer run, after this crop of households have access to microcredit for a while...

The economists also find that businesses that get created because of microcredit are "less likely to have an employee" and "less profitable" than businesses created in areas where people do not have the same access to microcredit.

The study followed households for 3.5 years after the opening of a microfinance institution in their area.

For more:

The Miracle of Microfinance? Evidence from a Randomized Evaluation

The Microfinance Backlash

Did The Father Of Microfinance Just Get Fired?

The Tuesday Podcast: What's Better For Helping The Poor — Greed Or Charity?

Copyright 2020 NPR. To see more, visit https://www.npr.org.

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