Do Microloans Really Help the Poor?
In the good fight to improve the lives of the world’s poor, many philanthropists and conscientious investors have joined the microloan experiment. Microloans are small amounts of money lent to those whose needs aren’t met by conventional banking. However, their efficacy has been at the center of somedebate. Six new studies have presented evidence that microloans aren’t as effective at alleviating poverty as expected, and while they do have small positive benefits, we aren’t seeing the level of social and economic transformation that was hoped for.
Innovations for Poverty Action and The Abdul Latif Jameel Poverty Action Labat MIT have overseen studies in Bosnia, Herzegovina, Ethiopia, India, Mexico, Mongolia and Morocco. What they discovered was that while microloans did improve small business ownership and investment, they did not increase income long term. In Mexico for example, loan recipients saw an increase in access to loans but, as the new small business owners had to pay the loans back their household consumption decreased.
In addition, research has speculated that microcredit did not have a significant positive effect on the financial independence of women or their empowerment to own businesses. They also don’t appear to increase school enrollment as was expected.
Dean Karlan, founder of the Innovations for Poverty Action says: “What we find is that modest changes do take place, but [microcredit] is not the transformative tool that it was often pushed as.”
These positive benefits are significant for the millions of people reached, says Alex Counts of the Grameen Foundation, a proponent of microfinance in poorer regions of the world since 1997. “I think in international development, we tend to go with fads,” says Counts. “We say bed-nets are the magical solution, and then we throw them away.”
The gist of Counts’ argument is that instead of rejecting the concept of microfinance, philanthropic organizations should update lending models and experiment with fresh strategies instead of tossing the baby out with the bath water. So, from a positive standpoint, it’s possible that this research coming to light may aid in changing the infrastructure of the platform.
“What we’re trying to distill from all of these studies is … how do we make this thing work better?” proclaims an optimistic Counts.