Effectiveness of microfinance in alleviating poverty

[Guest]

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[wannado]

There is some controversy about whether microfinance has an alleviating effect on poverty.  For example, I was discussing microfinance with a very smart economist acquaintance recently and he (figuratively) snorted, "It doesn't work!"  Indeed, while there is a lot of anecdotal evidence that microfinance borrowers have benefited from their loans, strong empirical evidence from suitably controlled studies has been hard to come by.  So I was very pleased to come across the following article in The Economist describing two studies that appear to be rigorously done and that found evidence for the benefits of microfinance.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14031284

The whole article is a good read, but I will quote only part here:

Broadly speaking, neither study found that microcredit reduced poverty. There was no effect on average household consumption, at least within a year to 18 months of the experiment. The study in the Philippines also measured the probability of being under the poverty line and the quality of food that people ate, and again found no effects. Microcredit may not even be the most useful financial service for the majority of poor people. Only one in five loans in the Hyderabad study actually led to the creation of a new business. Providing people with safe places to store their (small) savings may help them more in the long run.

That said, microcredit did have discernible effects. In India, people in the slums that had access to microcredit were more likely to cut down on things like tobacco and alcohol in favour of durable goods (particularly items such as pushcarts or cooking pans that are used heavily by traders and food-stall owners). One reason average consumption failed to increase may therefore be that more people were diverting some of their own income into starting or expanding their businesses. Microcredit clearly allowed more people to overcome the barrier posed by start-up costs. The MIT researchers found that as many as one-third more businesses had opened in slums which had a microcredit branch. This may mean that even though there was no measurable impact on poverty during the study period, there may well be some over a longer time-frame as these businesses prosper.

Tiny loans are unlikely to be enough to allow these businesses to grow to an efficient scale, of course. But the role of microcredit in allowing people to signal their creditworthiness is valuable, especially if their success makes banks more willing to lend them larger sums and leads to even more economic activity. By being willing to take a risk on entrepreneurial sorts who lack any other way to start a business, microcredit may help reduce poverty in the long run, even if its short-run effects are negligible.

I'm starting this thread in hopes that others will post good evidence about microcredit effectiveness when they come across it -- might be helpful in convincing some of the skeptics.

Marsha

[Eli]

A Ted.com lecture comes to mind here.  Hans Rosling doesn't speak specifically of Microfinance, but he speaks about poverty in an insightful and interesting way, with a touch of culture at the end:

www.ted.com/talks/hans_rosling_reveals_new_insights_on_poverty.html

He has a few other lectures listed on Ted.com if he happens to catch your interest.

[RichardF]

Here's a recent paper listed at Grameen Foundation: Books and Publications on Microfinance.

Credit Suisse Research Quarterly: Three perspectives on the achievements, challenges and future of microfinance (June 2009)

The microfinance sector has evolved with the rise of commercial microfinance and a gradual command of financial market expertise. Simultaneously, current challenges and future development needs have become the object of intensive discussion and also differing standpoints among microfinance professionals.

In this issue of its Research Quarterly – Microfinance, Credit Suisse interviewed GF president and CEO Alex Counts, Elizabeth Littlefield, director of the World Bank and chief executive officer of the Consultative Group to Assist the Poor (CGAP), and Dr. Milford Bateman, an active local economic development policy consultant and visiting Professor of Economics at the University of Pula, Croatia.

Highlights

• While Microfinance has proved to have an impact on the lives of poor people at an individual level, evidence of its socioeconomic impact on an aggregate level is more difficult to establish. A trend towards constructing objective measurements is being observed in the microfinance sector.
• The strong growth of microfinance creates opportunities to expand its positive impact on poor people, but it is essential that funds are directed to sustainable projects.
• Microfinance should not be regarded as a panacea, but as part of a comprehensive solution to promote poverty reduction and socio-economic development.

[RichardF]

Grameen Foundation : Publication download

Measuring the Impact of Microfinance: Taking Stock of What We Know

Grameen Foundation has published the first comprehensive literature review of existing research on the impact of microfinance around the globe. Written by Nathanael Goldberg, Measuring the Impact of Microfinance: Taking Stock of What We Know examines roughly 100 impact evaluations released since 1986, including Reaching the Poor with Effective Microcredit, Mahabub Hossain and Catalina P. Diaz’s report on Grameen-style microfinance in the Philippines, and Microfinance and Poverty, a study written by Shahidur Khandker that was published in 2005. Links to the original studies are available online.

Executive Summary
The prevalence of microfinance impact evaluations has increased in recent years, with programs using studies not just to prove the effectiveness of microfinance, but to improve it as well. However, the quality and rigor of microfinance impact evaluations vary greatly. This paper surveys the most significant microfinance impact evaluations that have been published as of mid-2005 and guides readers through interpreting the results and reliability of each study.

One of the first comprehensive microfinance impact assessments was “Credit for the Alleviation of Rural Poverty: The Grameen Bank in Bangladesh,” (1988) by Mahabub Hossain. Hossain found Grameen members’ average household income to be 43 percent higher than target non-participants in comparison villages, with the increase in income from Grameen highest for the landless, followed by marginal landowners. Hossain warned it was likely that his impact findings would be overstated, however, because Grameen members were found to be younger and better educated than nonmembers who were more likely to be landless. This type of difference between participants and comparison households is prevalent among microfinance impact evaluations and limits the conclusions we can draw from many of them.

The 1998 book, Fighting Poverty with Microcredit by World Bank economist Shahidur Khandker, and the related paper, “The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?” by Khandker and Mark Pitt, a Brown University economist, were influential because they were the first serious attempt to use statistical methods to generate a truly accurate assessment of the impact of microfinance among three Bangladeshi programs: Grameen Bank, BRAC, and RD-12. The centerpiece of their findings was that every additional taka lent to a woman adds an additional 0.18 taka to annual household expenditures—an 18 percent return to income from borrowing. However, NYU economist Jonathan Morduch responded with the paper, “Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh” (1998), citing serious concerns with their data and their statistical model.

With the benefit of more data, Khandker was able to improve their model, published in a 2005 update to the study, “Micro-finance and Poverty: Evidence Using Panel Data from Bangladesh.” The updated findings showed that each additional 100 taka of credit to women increased total annual household expenditures by more than 20 taka. There were no returns to male borrowing at all. Khandker found that between 1991/92 and 1998/99 moderate poverty in all villages declined by 17 percentage points: 18 points in program areas and 13 percentage points in non-program areas. Among program participants who had been members since 1991/92 poverty rates declined by more than 20 percentage points—about 3 percentage points per year. Khandker estimated that more than half of this reduction is directly attributable to microfinance, and found the impact to be greater for extreme poverty than moderate poverty, which microfinance was found to reduce by 2.2 percentage points per year and 1.6 percentage points per year, respectively. Khandker further calculated that microfinance accounted for 40 percent of the entire reduction of moderate poverty in rural Bangladesh.

The AIMS Studies
In 1995 the United States Agency for International Development (USAID) launched the Assessing the Impacts of Microenterprise Services (AIMS) Project, which developed five tools (two quantitative and three qualitative) designed to provide practitioners a low-cost way to measure impact and improve institutional performance. The tools recommended comparing existing clients to incoming clients and using the difference between them to estimate program impact. The idea behind the methodology was that since both the clients and the comparison households had chosen to join the program, there should be no difference in their “entrepreneurial spirit.” Otherwise, higher incomes among participants might simply be driven by superior business acumen. However, some experts, notably Dean Karlan in “Microfinance Impact Assessments: The Perils of Using New Members as a Control Group” (2001), have called into question the validity of this type of comparison. Karlan warns that this design can yield biased estimates of impact because MFIs may have originally started to work with different types of clients than they currently serve (for instance, an MFI may have cautiously started out working with better-off communities before branching out to poorer areas), and because clients who chose to enroll earlier may differ from those who chose to wait and see before joining. The AIMS Core Impact Assessments of SEWA (India), Zambuko Trust (Zimbabwe), and Mibanco (Peru) avoid this problem through the use of longitudinal data and non-client comparison groups. “Managing Resources, Activities, and Risk in Urban India: The Impact of SEWA Bank” (2001), by Martha Chen and Donald Snodgrass, compared the impact of clients who borrowed for self-employment to those who saved with SEWA Bank without borrowing, and compared both groups to non-clients. Borrowers’ income was over 25 percent greater than that of savers, and 56 percent higher than non-participants’ income. Savers, too, enjoyed household income 24 percent greater than that of non-participants. These findings indicate that microfinance—credit or savings—can be quite effective. “Microfinance Program Clients and Impact: An Assessment of Zambuko Trust, Zimbabwe” (2001), by Carolyn Barnes, found that while clients’ income was significantly higher in 1997 than the incomes of other groups, by 1999 the difference was no longer statistically significant, though continuing clients still earned the most. “The Impacts of Microcredit: A Case Study from Peru” (2001), by Elizabeth Dunn and J. Gordon Arbuckle Jr., found Mibanco clients earned $266 more per household member per year than non-participants.

Wider Impacts
Empowerment
Hashemi, Schuler, and Riley, in “Rural Credit Programs and Women’s Empowerment in Bangladesh” (1996), used a measure of the length of program participation among Grameen Bank and BRAC clients to show that each year of membership increased the likelihood of a female client being empowered by 16 percent. Even women who did not participate were more than twice as likely to be empowered simply by virtue of living in Grameen villages. This may suggest that a positive spillover from microfinance is affecting the norms in communities, but it could also imply that Grameen selects relatively empowered communities for program placement.

Contraceptive Use
“Poverty Alleviation and Empowerment: The Second Impact Assessment Study of BRAC’s Rural Development Programme” (1998), by A. M. Muazzam Husain, reported that members who had been with BRAC the longest had significantly higher rates of contraceptive use. Fighting Poverty with Microcredit found credit provided to women reduced contraceptive use among participants. However, as discussed above, the results from Khandker’s earlier work may be unreliable. “The Impact of an Integrated Micro-credit Program on Women’s Empowerment and Fertility Behavior in Rural Bangladesh” (1998), by Steele, Amin, and Naved, estimated that, even after statistically controlling for prior contraceptive use, borrowers were 1.8 times more likely to use contraceptives than the comparison group. Membership in a savings group was not found to have an effect. However, analysis of the actual number of births did not reveal a statistical relationship between either savings or credit and fertility.

Nutrition
Barbara MkNelly and Christopher Dunford, both of Freedom from Hunger, completed two comprehensive evaluations of Credit with Education programs: “Impact of Credit with Education on Mothers and Their Young Children’s Nutrition: Lower Pra Rural Bank Credit with Education Program in Ghana” (1998), and “Impact of Credit with Education on Mothers and Their Young Children’s Nutrition: CRECER Credit with Education Program in Bolivia” (1999). In Ghana, participants experienced an increase in monthly nonfarm income of $36, compared to $17 for the comparison group. Participants were more likely to breastfeed their children and more likely to delay the introduction of other foods into their babies’ diets until the ideal age, and they were more likely to properly rehydrate children who had diarrhea by giving them oral rehydration solution. These impacts paid off in a significant increase in height-for-age and weight-for-age for children of participants. “Credit Programs for the Poor and the Health Status of Children in Rural Bangladesh” (2003) by Pitt, Khandker, Chowdhury, and Millimet, found substantial impact on children’s health (as measured by height and arm circumference) from women’s borrowing, but not from male borrowing, which had an insignificant or even negative effect.

Determinants of Impact
Control of Loan
In Women at the Center, Helen Todd found that a quarter of clients in her sample were turning over their entire loans to their husbands. Todd described these women as the most marginal in her sample; though they represent only 25 percent of the members, 41 percent of the borrowers who were still poor after 10 years of participation were among this group. Other studies, however, found that that even in the case where women have the least control—i.e., women channeling their entire loans—women are better off with microfinance than without. “Rural Credit Programs and Women’s Empowerment in Bangladesh” confirms this conclusion, finding that 36 percent of Grameen and BRAC borrowers with no control of their loans could be considered empowered, compared to only 9 percent of women in comparison villages.

Incoming Poverty Level
The Second Impact Assessment Study of BRAC found that BRAC members’ non-land assets were 380 percent greater than those of comparison group households, and net worth was 50 percent higher. Significantly fewer BRAC households were poor (52.1 percent of BRAC households versus 68.6 percent of the comparison group). However, subgroup analysis revealed that landless clients (the poorest clients) benefited least from the program, while those with 1-50 decimals of land (“the poor”) benefited most. Another study, “Monitoring diversity of poverty outreach and impact of microfinance: a comparison of methods using data from Peru” (2005), by Copestake et al., found that impact for the wealthier half of Promuc clients was 80 percent higher than the impact for the poorer half.

However, other studies, including “Micro-finance and Poverty: Evidence Using Panel Data from Bangladesh,” found that the poorest clients benefited most from participation. “The Maturing of Indian Microfinance” (2004), by EDA Rural Systems, supports this conclusion, showing that while non-poor clients most often reported an increase in household income, they didn’t do much better than non-clients. Compared to non-clients, the very poor benefited most from program participation.

Family Crises
In Women at the Center, Helen Todd found that out of the 17 Grameen Bank borrowers who were still poor after a decade, ten of them had experienced a serious illness in the family in the three years before her study. According to Todd, the families that suffer crises were almost always forced to sell off assets to pay for medical treatment and to support the family through the loss of income from the husband or the wife. Other studies show mixed results on the effect of crises. Another Todd study, “Paths out of Poverty: The Impact of SHARE Microfin Limited,” found though 49 percent of SHARE clients had experienced a family crisis or natural disaster in the previous four years, they were no more-or-less likely to have experienced an increase or decrease in poverty. Todd attributed their ability to cope with crises to their extraordinary savings rates. “Moris Rasik: An Interim Impact Assessment,” edited by David Gibbons, however, corroborates Todd’s earlier findings from Women at the Center (this time with a larger sample size). Among clients who had experienced both serious illness and death in the family, nearly 60 percent remained Very Poor, versus only 40 percent for those who had experienced serious illness only. These results highlight the need to further develop savings and insurance products for the poor.

[arbuckle]

One of the studies quoted in the article from The Economist above was also written up in the following (by a professor at the London School of Economics):  Small is Smart--While it's no magic bullet for solving all the problems of poverty, it does relax credit constraints faced by the poor.

Available as an image from the original magazine http://epaper.financialexpress.com/FE/FE/2009/08/24/ArticleHtmls/24_08_2009_008_002.shtml?Mode=1
or in regular HTML at a website (which I'm including because I found the spacing between words in the above image to be small and difficult to read at times)
http://www.financialexpress.com/news/small-is-smart/505974/0

It's important to stress the importance of these studies--randomized controlled trials (RCTs) are the only type of study that can prove causation.  Observational studies, which are typically used in this context, are notoriously poor.  As these articles attempt to explain, selection bias is a huge problem.  There are many examples in the health sciences where the results of an observational study were reversed under a properly conducted RCT.  Observational studies can only indicate causality if the effect is very large--like smoking and lung cancer--but such examples are rare.

I'm really excited to see RCTs being used to study the effects of microcredit.  The only major downside to the two studies is that they had a maximum follow-up of 18 months, which means that longer-term effects could not be measured.  Hopefully they can repeat their study every couple of years in an attempt to determine the effects of microcredit over extended periods of time.

For those (like me) interested in reading the original studies, I'm included links to the PDFs below:

The miracle of microfinance? Evidence from a randomized evaluation
http://econ-www.mit.edu/files/4162

Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila
http://www.dartmouth.edu/~jzinman/Papers/expandingaccess_manila_jul09.pdf

[arbuckle]

A great place for information on understanding the evidence for microfinance is GiveWell: http://www.givewell.net/node/154

From their summary:

How microfinance helps people: Anecdotes are common about using loans to expand personal businesses, but we are skeptical that these anecdotes are broadly representative. However, we believe that microfinance may often benefit people by helping them smooth consumption, manage their lives, and plan for uncertainty.

When microfinance helps people: We believe that nonprofit microfinance is likely to be a strong humanitarian intervention for people who have low and unstable incomes; would not otherwise have access to financial services; and use any loans sustainably, such that they are able to repay them.

What the empirical evidence says: Most studies of microfinance's impact have serious methodological limitations, but the strongest studies we've seen generally indicate that microfinance programs - when meeting the conditions above - have improved clients' standards of living.

Conclusion: We would guess that microfinance is generally a strong and cost-effective humanitarian intervention, where it serves low-income people who would not otherwise have access to financial services, and are willing and able to repay any loans they take out. However, existing empirical information about this intervention is very far from what it would need to be to give us high confidence.

I'm particularly fond of the work done at GiveWell because of their rigourous criteria for evaluating programs: http://givewell.net/node/312#Trackrecord

[Sengbe Pieh]

The following article about the pros & cons of microfinance is from the Boston Globe, Sept. 20, 2009
http://www.boston.com/bostonglobe/ideas/articles/2009/09/20/small_change_does_microlending_actually_fight_poverty/

Small change
Billions of dollars and a Nobel Prize later, it looks like ‘microlending’ doesn’t actually do much to fight poverty

By Drake Bennett, Globe Staff  |  September 20, 2009

In the world of international aid, microcredit is a rock star. The practice of giving very poor people very small loans to start very small businesses has been hailed as one of the very few unambiguous success stories in the long, frustrating fight against Third World poverty. The pioneer of the practice, Bangladesh’s Grameen Bank, has disbursed more than $8 billion in unsecured loans, usually in amounts under $100, to people traditional banks ignore. Along with a 98 percent repayment rate, Grameen has accrued an inspiring collection of stories about its overwhelmingly female borrowers, whose microloans allowed them to start up an embroidery or pottery business, or a snack cart or a stand selling cell phone cards, and through such petty entrepreneurship lift themselves out of poverty. “Small Loans, Big Gains,” a 2002 Globe editorial on microcredit was titled.

Microlending institutions have sprung up all over the developing world, from India to Bolivia to Serbia; by one estimate, over 150 million people worldwide have taken out a microloan. Government aid groups and NGOs have rushed to fund them, and so have Wall Street banks and hedge funds, enticed by the promise of an anti-poverty program that can do so much while paying for itself - and even turning a nice profit. Grameen Bank and its founder, Mohammad Yunus, were awarded the Nobel Peace Prize in 2006, and Yunus is fond of saying that, thanks to microcredit, his grandchildren will have to go to museums to know what poverty looks like.

But two new research papers suggest that microcredit is not nearly the powerful tool it has been made out to be. The papers, by leading development economists affiliated with MIT’s Jameel Poverty Action Lab, have not yet been published, but they are already being called the most thorough, careful studies yet done on the topic. What they find is that, by most measures, microcredit does not offer a way out of poverty. It helps a few of the more entrepreneurial poor to start up businesses, and at the margins it may boost the profits of existing microenterprises, but that doesn’t translate into gains for the borrowers, as measured by indicators like income, spending, health, or education. In fact, most microcredit clients actually spend their borrowed money not on a business, but on household expenses, on paying off other debts or on a relatively big-ticket item like a TV or a daughter’s wedding. And while microcredit champions point to microloans as a tool for empowering women, the studies see no impact on gender roles, and find evidence that if any one group benefits more, it’s male entrepreneurs with existing businesses.

“Microcredit is not a transformational panacea that is going to lift people out of poverty,” says Dean Karlan, an economics professor at Yale and a co-author of one of the studies. “There might be little pockets here and there of people who are made better off, but the average effect is weak, if not nonexistent.”

In other words, Karlan and others argue, there’s a place for microcredit in the campaign to help the world’s poor, it’s just not a very big one. And in the global anti-poverty fight - where aid budgets and public attention are both limited, and the potential stakes measured in the trajectories of millions of lives - it’s vitally important to know what actually works, and what is simply hype. That’s all the more true with microcredit, where the interest rates are usually far higher than what we’re accustomed to in the developed world, and where there’s always the risk that poor borrowers, just like wealthier ones, may end up piling up debts they can’t repay.

Microcredit’s defenders say the new findings, while suggestive, aren’t enough to prove anything. Some argue that they actually show that microcredit works, in a qualified way, providing a cheaper alternative to the village moneylender and his ruinous interest rates. Microcredit’s more dramatic effects, they suggest, may take longer to appear than the 1½-to-2-year windows the researchers looked at.

Underlying all of this is a debate over the role and the importance of the micro-entrepreneur. Part of the appeal of microcredit lies in its suggestion that the world’s slums are populated not by helpless victims of global forces, but eager entrepreneurs lacking only a $30 loan to start a business and pull themselves out of poverty. The new research underlines the fact that, inspiring as that story may be, it misrepresents how both individuals and nations climb the economic ladder. Developing nations already have far more petty entrepreneurs than wealthy countries do, mostly because people there have little choice but to start their own business if they want to make any money. What these countries don’t have enough of are the kinds of steady jobs that more reliably raise incomes, and the sort of enterprises, often quite large, that provide them. Truly addressing the poverty of the developing world may require that we think macro rather than micro.

In 1976, Muhammad Yunus was an American-trained economics professor at Bangladesh’s University of Chittagong. A brutal famine two years earlier had made him vividly aware of the precarious lives of the very poor, and he had begun to spend much of his time in Jobra, a village that abutted the university. It was there, he recounts in his autobiography, that he met a woman named Sufiya Begum, a young mother of three who made bamboo stools by hand. Begum was too poor to afford the 5 takas (about 22 cents) per stool that her bamboo cost, so she had to borrow the money from merchants. As part of the deal, she then had to sell the merchants her stools, and they set their prices so that she only cleared two cents a stool.

All she needed to break out of that pernicious cycle, Yunus realized, was 22 cents. Then she could buy her own bamboo and sell her stools on the retail market, using what she earned to buy more bamboo and pocketing the profits. So Yunus decided to lend it to her himself. Working with a student, he drew up a list of 42 Jobra villagers in situations like Begum’s and lent them, out of his own pocket, the money it took to pay off their debts. All in all it came to $27.

It was out of this first experiment that Grameen Bank was born; last month the bank disbursed just under $97 million worth of loans to borrowers all over Bangladesh. Yet, despite the explosive growth, there’s been little rigorous research on the efficacy of microcredit.

This is not necessarily unusual for development and antipoverty interventions. Such research can be very difficult to do. When the target is something as complex as poverty, even at the level of a small village cause and effect can be maddeningly elusive.

And once an aid organization or philanthropically minded corporation, won over by powerful success stories, commits to an antipoverty tool, whether it’s microcredit or bed nets or building rural schools, they tend to lose interest in funding research that could suggest that it doesn’t work.

Ironically, the very speed with which microcredit has spread has made it hard to do the sort of comparisons that would most clearly measure its impact: in Bangladesh today it’s impossible to find a community where people don’t already have access to microcredit.

The new microcredit studies set out to address these challenges. At least one author of each of the papers is affiliated with MIT’s Poverty Action Lab, a research center that brings together economists with a determinedly experimental bent. In particular, its researchers all share a belief in randomized controlled trials - the same sort of test that new drugs have to undergo - as a tool for evaluating poverty alleviation measures.

Karlan and his co-author, Jonathan Zinman, an associate economics professor at Dartmouth, looked at a bank in the Philippines that offered microloans. They created their controlled experiment by altering the algorithm the bank used to evaluate creditworthiness so that some borderline applicants were randomly denied loans while other otherwise identical applicants had loans approved. The researchers then followed up with the borrowers and nonborrowers to see what difference the loan had made.

The answer was not much. Neither household income nor spending rose for those who got microloans. And borrowers who did put the money into their businesses - instead of using it, as many did, for household expenses - actually shrank rather than grew their businesses. Karlan and Zinman suggest that this might be because the business owners were taking advantage of the loan to fire unproductive workers to whom they owed financial favors, and those firings seemed to explain the very small gains in profit Karlan and Zinman found. In addition, the gains accrued only to male entrepreneurs, not the women usually targeted by microcredit programs.

The second study, co-authored by Abhijit Banerjee and Esther Duflo, economics professors at MIT, along with Rachel Glennerster, executive director of the Poverty Action Lab, and an MIT economics doctoral student named Cynthia Kinnan, found a slightly larger impact, though a selective one. Working with a microcredit bank in India that was looking to expand in the city of Hyderabad, the researchers did find some small positive effects. Borrowers who already had a business did see some increase in profit. Households without businesses that the researchers judged more predisposed to start one were found to cut back on spending, suggesting they were saving to augment their loan for a capital business expense like a pushcart or a sewing machine. The researchers also found small but encouraging shifts in household spending across the board, with less money spent on “temptation goods” like alcohol, tobacco, and gambling.

Still, overall household spending - a key indicator of financial well-being - stayed about the same. And the researchers found no effect on children’s health or education levels, and the women in the borrower homes were no more likely to play a role in household decisions than those in the control group.

To Duflo, this only seems disappointing because expectations for microcredit are so high.

“I don’t see this as a negative finding,” she says. When asked why she thinks microcredit didn’t boost health and education outcomes, she says, “I would really ask the question, ‘Why did we expect all these things to happen?’ If you give people access to a financial instrument, it’s like any other instrument. It’s useful, but it’s not like the miracle drug to end poverty.”

For microcredit’s defenders, evidence like this is, at best, an incomplete portrait. In part that’s because of the relatively short time horizon of the studies.

“Certainly if people expected to see increasing incomes right away, in 12 months, that might be too much to expect,” says Nachiket Mor, an economist and president of India’s ICICI Foundation for Inclusive Growth.

Other microcredit proponents argue that the fact that microcredit has proliferated as fast as it has, with new clients signing on in droves and old ones coming back repeatedly, means it must be providing a reliable benefit to borrowers, if only by allowing them to pay off higher-interest moneylender loans.

“The fact that [microcredit] has survived commercially, I take that more seriously than any other piece of evidence,” says Tyler Cowen, an economics professor at George Mason University who has studied the topic.

Even among some of microcredit’s more passionate proponents, however, there has been a ratcheting down of the rhetoric in recent years. What microcredit may do, they argue, is not transform lives, but simply ameliorate them, giving poor people a more affordable source for credit, and one that, unlike some moneylenders, will not resort to physical violence if someone can’t repay.

“The picture that emerges is not of people climbing out of poverty through microenterprise, but people doing what they need to to get by,” says David Roodman, a microcredit expert at the Center for Global Development.

Nonetheless, the microcredit narrative of entrepreneurship and self-advancement is a stirring one, and still tends to dominate the image microcredit institutions present to the world.

Karlan sees the romance of this ideology standing in the way of measures that might more directly aid poor households. In many situations, he argues, the most helpful thing for poor households may not be a loan - especially since microloan interest rates can run from 30 up to 100 percent - but making it easier for them to save, or allowing them to buy some form of formal insurance policy against financial shocks. Research has shown that even people making $2 a day can put some money aside, and in many poor neighborhoods people don’t save as much as they might simply because there’s no trustworthy place to put their savings.

And if there are interventions that can lift whole neighborhoods - and, ultimately, whole nations - out of poverty, they will probably have to be much broader in scope. Part of the appeal of microcredit is that it avoids the frustrations of anti-poverty campaigns that seek to catalyze economic growth at a large scale. But it’s a basic tenet of economics that scale has its advantages. Forty workers at a textile plant are going to be much more productive than 40 microentrepreneur weavers each working by themselves.

Partly in response to these concerns, Grameen itself has begun to offer a line of loans of up to $10,000 for what might be called mini- rather than microenterprises. And in a more marked shift, a few NGOs have begun to focus on the previously neglected sector of medium-sized businesses in the developing world, looking not just at loans, but buying equity stakes in the companies to provide them with interest-free money. They’re bigger investments, and in the end they may have far bigger returns.

[tomviolence]

Interesting article ....

There is no panacea, and never will be one. It does bear thinking that microcredit is certainly working in the sense people use it. The thousand businesses a month getting funding here do not neccessarily wipe out poverty, but rather enable existing small businesses access to better funding than they might have had otherwise. It is hard to measure the small differences this makes. If Grameen stopped funding, I have no doubt the negative changes seen would be significant, even though the positive impact is hard to see.

Once concern that is just touched on is the big increase in people interested in funding it. I am afraid too much credit might be bad, just as here in the US, a big boom in easy credit can have an unhappy fall out. That is one specific concern I have with Kiva's stated billion dollar plans, will the need for loans to meet that goal cause reckless lending and borrowing ?

[Mona]

Great video about women being empowered through microfinance in Africa!

http://www.womenempoweredproject.com/#mi=1&pt=0&pi=9&p=-1

[Mona]

I have just finished reading The Poor Always Pay Back: The Grameen II Story by Asif Dowla and Dipal Barua. It is for me not only a proof that microfinance does work, but shows also in a very detailed way the impressive changes Grameen has applied since its beginning. 

Quote from the foreword, written by Muhammad Yunus:
".... This book documents the process of transition, examining the changes to the system and their implication for Grameen Bank, its borrowers and its staff. I am very happy that we decided to go through with it. The new system has made life much easier for the borrowers, and staff report that their work is far better organized now and their performance can be assessed in a more transparent fashion. This book details Grameen II for policymakers, practitioners, and the larger development community. Once can see the strength of Grameem II in features such as open-access savings, flexible loan products, a range of deposit products attractive to savers, self-reliance at the branch level, freedon from donor dependence for funds, maintenance of the interest rate at close to the commercial rate while keeping each branch profitable from the second year of operation, insurance products, a pension fund, education loans, loans geared to the needs of beggars, total computarization of branch-level accounting and MIS, elimination of the staff's reliance on paperwork, and the uncoupling of microcredit from the myth of group guarantee, joingt liability, and legal instruments.

This book captures very well the central message of Grameen - that the poor always pay back, not because they are afraid, but simpy because they are smart...."

Way to go, Grameen! 

P.s.: Thanks, Michelle, for the pointer to this great book!