Microcredit: a promise or a threat?

“If we are looking for one single action which will enable the poor to overcome their poverty, I would go for credit.” Yunus, 1994

Among the innovations in the NGO sector and the upsurge of “social entrepreneurship” that we’ve witnessed in the last decades, no example stands out more prominently than the microcredit industry. Microcredit started from the early efforts of pioneer banker Mohammed Yunus in Bangladesh, and was characterized by a strong social mission of service to the poor. It has since achieved tremendous success and grown to become a major global industry, having extended loans to over 205 million poor people as of 2010. The commercial potential has been surprising to many: repayment rates of over 95% for most microcredit institutions, enabled by group lending schemes that hold each borrower accountable to a whole group of borrowers, have challenged long-held assumptions that the poor are untrustworthy and have raised eyebrows in the mainstream banking sector.

What is much less clear, and the topic of heated debate, is whether microcredit programs have delivered on the social value promises on which they had been initially based. Is microcredit really able to change the lives of the poor, lift them out of poverty and improve their conditions? Skeptics have pointed out that microcredit’s “win-win” rhetoric might have far exceeded available academic evidence. Furthermore, scandals and controversies around the methods employed by several microcredit institutions to ensure timely repayment have seriously injured the image of the sector.

While recent studies have been using more sophisticated designs to assess the impact of microcredit, it has been confusing to see that results do not uniformly point towards one direction. To shed some light on the important issue of microcredit effectiveness, we used a quantitative methodology known as meta-analysis to perform a synthesis of available evidence to date. Meta-analysis methodology has originated from medicine and psychology, and is frequently used to consolidate the findings of diverse academic studies on a particular treatment’s effectiveness. By synthesizing all available studies conducted, we are better able to know the extent to which a treatment can be considered beneficial. Similarly, we can assess if current findings point to an overall positive –or not– effect of microcredit on a number of key indicators; namely, the development of the poor entrepreneur’s venture, the financial well-being of the entrepreneur’s family, their health and nutrition levels, the education of their children, the empowerment of women and the creation of social capital.

Results suggest that microcredit can be expected to have overall positive results, although not transformative, on all of these key outcomes. Some outcomes can be expected to benefit the most. Specifically, the greatest impact of microcredit is on the empowerment of women. In many developing countries where the position of women is restricted inside the house and away from market or other public activities, the ability to control funds, invest them and contribute to the family income has added to the stature of women and made them more respected and empowered.

Another positive by-product of microcredit is the creation of social capital. While clients gather in microcredit groups for economic reasons, in the process they form tight networks of relationships and an awareness of how to behave in the public sphere. Finally, financial well-being of clients seems to benefit substantially from microcredit, more so than the development of the entrepreneur’s ventures. This finding suggests that while microcredit can be moderately beneficial to the entrepreneurial ventures, as proponents have claimed, there might be a stronger effect on the financial well-being of the entrepreneur’s household, due to loans helping smooth their saving and consumption flows.

The conclusion? Microcredit is not the ultimate solution but is overall not harmful either. While we need not discredit the whole microcredit industry, we should however keep in mind that the effect on individual clients might vary from very positive to very negative. The next stage for the industry might therefore lie in making these more refined distinctions. Not every poor person is necessarily an entrepreneur. Some loans can be structured to support entrepreneurial ventures while others to simply smooth out consumption and production. The availability of microloans and other financial services for the poor is important, but is only part of a wider range of solutions. And perhaps the greater contribution of microcredit is not on the financial results but on its ability to create common spaces that forge new interactions, relationships and identities for women clients.

Por Myrto Chliova, PhD Student

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