This blog has on a few occasions pricked the balloon of
those who believed another type of approach by capitalism can solve poverty and
deprivation. Much has been claimed about micro-credit and the efforts of such
people as Yunus and the Grameen bank and the scores of emulators that followed
and this blog has deflated much of their claims.
Yet again another report has emerged casting doubts on the
micro-banking panacea for poverty. Six studies from different parts of the
world, published in the American Economic Journal: Applied Economics, all find
that microcredit is not an effective tool at helping people escape poverty. The
findings corroborate calls that microfinance advocates have oversold the
benefits of providing loans to the world’s poor, especially women. Randomized
control trials were used to determine what happened when people in Bosnia and
Herzegovina, Ethiopia, India, Mexico, Mongolia, and Morocco took out
microloans. They were conducted independently of one another and covered a
total of 37,000 people. All six showed that loan recipients experienced
“modest, but not transformative, improvement” in their lives.
“One of the things
that is interesting is how consistent the findings are, based on very different
contexts and even quite different products,” said said Timothy Ogden, managing
director of the Financial Access Initiative at NYU.
“These loans do help, but the changes are not
transformative, certainly not transformative enough to justify charitable
donations to the standard microcredit model. We have seen, though, that these
are viable profit-making products, and so investors interested in a
double-bottom line should take note,” said MIT economist Esther Duflo,
co-author of two of the studies, in a news release.
The studies, conducted by researchers affiliated with
Innovations for Poverty Action (IPA) and The Abdul Latif Jameel Poverty Action
Lab (J-PAL), conclude that while microloans can increase small business
ownership and investment, the small, short-term loans generally do not lead to
increased income, investments in children's schooling, or substantial gains in
women's empowerment for poor borrowers.
"The studies do not find clear evidence, or even much
in the way of suggestive evidence, of reductions in poverty or substantial
improvements in living standards. Nor is there robust evidence of improvements
in social indicators," the introductory paper to the studies reads.
The micro-credit model will still continue despite the
disappointing outcomes nevertheless. Lending of this type will still appeal to
investors, Ogden said. While cash transfers have emerged as an alternative with
significant impact, there are people and organizations looking to make a
financial return on investment. That is something loans can provide as opposed
to just giving people money. They may well tweak the process by allowing breaks
for repayments, shorter loans, changing when loan cycles begin. No doubt
charities and various NGOs will still promote such financial service practices
as micro-credit, after all, they have to stay in existence themselves.
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