The sheen on microfinance continues to dull.
Held as a significant way to lift people out of poverty less than a decade ago, the industry has faced increasing criticism and scrutiny. Credit (aka loans), the part of microfinance touted loudest, has been held under the microscope since the downfall of the microfinance industry in India in 2010.
A comprehensive study of all the available research reveals that loans are great at helping businesses grow and that is about it. Even over the long term, there are not significant increases in income and consumption for families.
The review comes from MIT economist Abhijit Banerjee, one of the central figures in the randomized control trials movement in international development. He is not the first to go through the evidence on microfinance offerings. His findings add more weight to the caution expressed by the likes of David Roodman, Dean Karlan and others.
“At least in the one- to three-year horizon, we see no evidence of microcredit transforming the lives of its beneficiaries,” writes Banerjee.
The hype of microcredit is due to a 1998 study carried out by Mark Pitt and Shahidur Khandker in Bangladesh. They found that offering Bangladeshi women small amounts of credit had a significant and positive impact on their lives.
Microcredit given to women saw improvements in household expenditure, non-land assets held by women, labor supply and children’s schooling. Impacting cross-cutting issues in the lives of the Bangladeshi poor, the findings helped usher in the rapid rise of lending to women from Bangladesh to Kenya.
Years later, Roodman and NYU’s Jonathan Murdoch challenged the study’s findings. They tried to replicate the findings using the study’s results in 2009 and could not arrive at the same conclusions.
“We show that the original results on poverty reduction disappear after dropping outliers, or when using a robust linear estimator…We conclude that questions about impact cannot be answered in these data,” said Roodman.
Why is microcredit not doing what people says it does? Banerjee says that the evidence points to many different possibilities:
- People might not need the credit.
- People want money to spend, not to grow a business.
- People avoid investing in businesses because it costs a lot of money to achieve significant growth.
- Money is paid back too quickly. People may avoid taking risks (such as starting a new business).
- Borrowers are not good at growing a business.
- Poor judgement and understanding of loans.
All are different from each other and require altering approaches to the design of loans and programs. Experiments have been undertaken to try to improve the way that people use loans. Each employ different nudges that are meant to optimize decision-making. Unfortunately, there is no evidence of impact for such interventions, says Banerjee.
Spurning on larger business growth has been tried, with some success, but there is not experimental evidence. Banerjee proposes that research is needed to determine whether business owners are capable of paying back much larger loans. If loans can be designed so that it happens, more money could be made available that would have a significant impact on business owners, their families and possibly employees.
All is not to throw cold water on a drowning solution. The tone of Banerjee’s paper is one that asks questions and seeks to better understanding what is happening. His concluding research suggestions are ones that hope to improve microcredit offerings so that they can benefit people in the way that was once thought.