OpenIDEO is an open innovation platform. Join our global community to solve big challenges for social good. Sign up, Login or Learn more

JPAL/IPA: Where Credit is Due: analysis shows that microcredit does not have a transformative impact on poverty

Data does not support the the theory that microcredit helps fight poverty.

Photo of Ilgiz S
4 2

Written by

from: http://www.povertyactionlab.org/publication/where-credit-is-due

Key Results: 

Demand for many of the microcredit products was modest. In Ethiopia, India, Mexico, and Morocco, when MFIs offered loans to eligible borrowers, take-up ranged from 13 to 31 percent, which was much lower than partner MFIs originally forecasted.Expanded credit access did lead some entrepreneurs to invest more in their businesses. In Bosnia and Herzegovina and Mongolia, access to microcredit increased business ownership. 

All but one study showed some evidence of expanded business activity, but these investments rarely resulted in profit increases. Microcredit access did not lead to substantial increases in income. Despite some evidence of business expansion, none of theseven studies found a significant impact on average household income for borrowers.

Expanded access to credit did afford households more freedom in optimizing how they earned and spent money.Six studies suggest that microcredit played an important role in increasing borrowers’ freedom of choice in the ways they mademoney, consumed, invested, and managed risk.

There is little evidence that microcredit access had substantial effects on women’s empowerment or investment in children’s schooling, but it did not have widespread harmful effects either. 

Microcredit did not lead to increases in children’s schooling in the six studies in which it was measured, and only one of the four studies that measured women’s empowerment found a positive effect. 

Across all seven studies, researchers did not find that microcredit had widespread harmful effects, even with individual-liability lending or a high interest rate.

Attachments (1)

4 comments

Join the conversation:

Comment
Photo of OpenIDEO

Hi Ilgiz, interesting post! Any chance you could find an image to go along with it? Images help grab attention and tell a story with higher impact. You should be able to use the Update Entry button on the right of your post and follow the instructions to add images from there. We know occasionally people have issues uploading images so let us know by hitting the Feedback button at the bottom of most pages of our site if you face any problems. Looking forward to seeing more of your inspiring insights on OpenIDEO.

And here's more handy tips on the Research phase: http://bit.ly/oi_inspire

Photo of Sanjay Bhargava

It is not hard to see why micro credit will not work. What everyone needs is a credit line not a loan where you can borrow and repay ( daily if you like) where the interest rate is high and amounts are low. For loans for say tuition, vehicles, housing, working capital the rates have to be low and the amounts have to be large.

Photo of Jared Bybee

This is an important post. It is easy to get swept up in the idea of a magic answer, a silver bullet, that can solve all sorts of problems. For many years micro finance has had that aura, but the results are much more complex.

Also important to note that not all micro finance institutions are the same. Some are mission based and do a better job at really seeing the success of their borrowers. The great majority are simple profit seeking enterprises - and they can be very profitable. It is near impossible for people on the ground to distinguish one from the other, they often talk and look very much the same.

Credit needs to be part of the solution, and MFI's may be one tool to disseminate credit, but it is VERY important not to think that MFI's will be a magic answer.

Photo of Shane Zhao

Great point Jared. MF loans, like any regular loan, may not be fully effective to help the borrower without an extra layer of guidance. Like you said, mission based MFI have a greater success rate when they work closely with the borrower to guide how the investments are used. A great example of that is the Banco Palamas program in Brazil. Micro loans taken out by community members have to be re-invested back into local businesses. This has led to higher rates of success in helping local economies become self-sustainable overtime.

Banco Palamas: https://openideo.com/challenge/financial-empowerment-challenge/research/banco-palamas-the-solidarity-nework