In doing so, many economists submit , they show that microfinance has a powerful potential to reduce poverty. But evidence that microfinance actually works is mixed. My study aimed to make sense of this inconclusive evidence, taking a macroeconomic approach that pulls information from many countries together to provide a clearer picture. The key variable of significance in my analysis is participation in microfinance programs.
I defined this in two ways for each country studied: the proportion of total clients as a share of national population, and the average size of loan gross loan portfolio over total clients , using microfinance data from the Microcredit Summit Campaign and MIX Market , a microfinance auditing firm. What I found was a negative relationship between microfinance participation and poverty, meaning that the more people in a given country received small loans, the less poverty it registered.
Microfinance is no panacea. Numerous studies have shown that country-specific and cultural factors are determinants in how microfinance will interact with poverty , and there are occasionally devastating tales of failure in which the inability to repay a very small loan has plunged households further into desperate penury.
The microcredit movement has been undeniably successful in opening up financial services to poor people across many countries. But what has its track record been when it comes to lifting people out of poverty? Over the past decade, this question has occupied researchers, who have conducted randomized studies across a variety of countries and settings. Many concluded that the classic conception of microcredit was based much more on anecdotes than on robust evidence.
Rather than see microcredit as it was portrayed in its heyday — as a way to get people out of poverty — we should see it through a different lens: as a way to expand options for poor people by offering more reliable financial services. Extremely poor people need these services just like everyone else, and the availability of capital to deal with irregular and at times unpredictable incomes is a huge help to them.
This benefit, along with its impressive growth around the world, arguably makes microcredit a success. Go behind the scenes. Chat with creators. Support Vox video. Heads up: You might be asked to sign in to Google first. Another problem is predicting who will repay a loan. However, that changed in the late s and early s, with a new vision of how to offer microcredit to the poor, and what it could do for them.
Economist Muhammad Yunus played a big role in shaping this new perspective. In his book Banker to the Poor , Yunus describes meeting a woman in Bangladesh who was making stools out of bamboo and earned only two cents per day, because she had to repay so much money to her bamboo supplier.
If she had a dependable source of credit, Yunus thought, she and others in similar situations could make their way out of poverty. He also took the crucial step of convincing outside funders, such as the Ford Foundation, that it was a good idea to invest in loans for the very poor. The original Grameen Bank model included a few core elements.
The first is that after a loan for a microenterprise is granted, repayment starts immediately, with frequent, regular payments over the course of a year or so. The second is group loans, in which a small group of borrowers from different households receive loans together — which then puts pressure on the members to help each other repay.
Finally, the model cuts overhead costs by having loan officers hold weekly meetings in villages to collect and disburse payments, obviating the need for physical bank branches. A huge number of organizations all over the world entered the scene over the next two decades more than 3,, as reported in , though most borrowers are clustered in a few countries such as India and Bangladesh. Borrowers repay loans to microcredit institutions at very high repayment rates , upward of 96 percent on average.
Tim Ogden, managing director of the Financial Access Initiative , says that before Grameen Bank, there was a consensus that it was bad to lend to those living on only a dollar or two per day, because it would only trap them in debt. How is that not going to trap her in debt? Female empowerment also became integral to the story. Many microcredit institutions including Grameen made it a priority to lend to groups of women about 80 percent of microcredit borrowers are now women.
Investors and donors poured money into microfinance, and in , Yunus won the Nobel Peace Prize. In the s, skepticism about the promise of microcredit started cropping up. One concern critics raised was the possibility that some microcredit institutions were harming people.
In Andhra Pradesh, a state in southeastern India, the government issued an ordinance in essentially shutting down microcredit institutions, pointing to over-indebtedness, the pressure to repay loans, and widely reported suicides among borrowers.
On average, institutions offer loans at annualized interest rates of around percent , though some rates are much higher. While some people — including Yunus — have argued interest rates above a certain level means that microcredit firms have turned into predatory loan sharks, others counter that the rates sometimes have to be high to cover costs of sustainably lending to the poor.
Credit alone is not enough to boost productivity, sustain rising incomes and reduce poverty. Some market saturation exists in the microfinance sector, which could also lead to diminishing returns.
So in addition to credit, poor populations need skills training and better marketing networks to expand their non-farm activities into more lucrative sectors. Lower interest rates. Even though MFI interest rates are much lower than those charged by informal moneylenders, they still have room to reduce rates further while realizing sufficient returns. Lowering this cap on MFI interest rates will increase the number of poor households who are able to take advantage of the benefits of microfinance programs.
Encourage more competition among MFIs. This could lead to the closing of smaller MFIs or their merging with larger MFIs, thus reducing competition in the sector.
The authors recommend that the MRA put policies in place to protect smaller MFIs and prevent monopolization of the sector. Latest from this Blog Innovations to build reslience. Climate Change.
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