The idea of providing small loans to the poor is relatively recent, although it has evolved and spread since its conception the notions remain the same, to provide capital to those in poverty for investment in business, to raise incomes and ultimately alleviate the restrictions on their standard of living. Microcredit first arose in the late 1970’s after Muhammad Yunus saw the need to cater for the banking needs of the poor in Bangladesh, his model of group lending has since been replicated elsewhere around the world. Those in poverty typically do not have access to credit from regular banks as they can’t provide the usual assurances of repayment such as a credit history or collateral as well as it being virtually impossible for banks to perform their usual screening processes. In countries where many who need loans can’t even fill in the paperwork this system was designed to create a way to fund enterprise and business to lift people in places similar to Bangladesh out of poverty. Whether microcredit has worked on a significant scale is still under much debate, it is often hard to evaluate the impact of it on the important and main issues targeted by microcredit such as health, income levels, female empowerment and education. Older studies tend to maintain that incomes benefit from the schemes whereas more recent, randomized evaluations seem not to have found such claims. Whether this is due to changing environments over time, different methods of study or variations in measurements of impact needs to be examined.
Ever since microcredit first began to capture public attention 25 years ago, the usual story line has been that it funds creation and expansion of microenterprises which in turn produces additional income that lifts the borrowers’ households (especially women) out of poverty. Proponents argue that microcredit diminishes market failures, spurs micro-enterprise growth, and boosts borrowers’ well-being in areas such as health and education. Replications of the movement’s flagship, the Grameen Bank of Bangladesh, have now spread around the world. To evaluate the impact of microcredit we need to assess what it is that is being targeted by these loans, what are the aims of the institutions and whether they are being reached or not. Another important point to investigate is whether these effects are purely short term solutions to a long term problem. Proponents of microcredit claim that it leads to higher employment and incomes through creation and growth of businesses, a reduction in welfare levels, increased levels of education and quality of nutrition. It is often argued that availability of microcredit leads to higher female empowerment and gender equality. Women are considered to be empowered if they undertake microcredit loans, because it is usually the responsibility of the husband and therefore it positively influences their socio-economic status and also their standing in the household. It is believed that they are more efficient targets for the money as they tend to spend their income on more desirable goods such as healthcare, education and clothes for their children whereas men in developing countries are often reported to spend their income on luxuries or goods such as cigarettes and alcohol. Although this doesn’t equate to much expenditure it is telling of the nature of household consumption.
By the end of 2006 79 million of the poorest women in the world had access to microcredit services (Harris, 2007) which has caused a significant contribution to gender equality and general conditions for women. An early study done on microcredit by Grameen bank (Goldberg, N., 2005) seems to agree that the loans given to these families have a greater impact if taken by the women, even if they do not use the loans themselves. This has been disputed by more recent studies which suggest that women do not have as much control over the loans as previously thought. They found that the men often spend the money on what they want whilst the women take the money out in their name therefore taking responsibility for the debt. It is often the case that the bigger the loan the less control the women have over the spending or investing of it. There are possible negative effects to women of microcredit which must be mitigated by the providers of the credit. Apart from the man taking control of the loan women may battle with a higher workload now that they have responsibility for the loan and its repayment. Barriers to making an impact outside the household may also arise due to social attitudes towards woman.
One of the most important factors determining the success of a microcredit scheme is what happens to the loan after it is given by the MFI, this will determine how much of an impact it will have on the lenders and on the surrounding environment. Often loans are given with conditions or incentives to direct the borrowers to undertake beneficial activities. Scheduled loans increase over time providing that previous performance has been good. This gives group lending a certain strength as it encourages lenders to observe their peers and reduce risky behaviour. Innovations include contracts that give borrowers incentives to exclude bad credit risks and monitor other borrowers’ activities, schedules of loans that increase over time conditional on successful performance, and weekly or semi-weekly loan repayment requirements (Morduch, 1998). However, even with structures such as these the poorest borrowers tend not to invest in businesses or create an environment to employ themselves, rather they use the loans on basic day to day needs like food. Some of the problems of microcredit arise here, rather than focussing on investment in the poor through education, training and job creation, microcredit looks to the poor themselves to self-start their climb out of poverty. This system has increased the numbers of businesses but has had little to no effect on incomes after interest.
Not surprisingly it is very hard to scientifically measure the impact of microcredit. Its effect is easily overstated if we don’t include other variables which may cause increased incomes. If, for example, those who apply for loans see increased incomes and standard of living is that result solely down to the loan? Perhaps people who do apply may simply be the type of person to push themselves on to better things though ambition and determination. Effects like this skew the assessment of microcredit making it hard to evaluate its true effectiveness. There have been many studies conducted to look at the influence of microcredit in developing countries, some have been discredited due to lack of sound methodology and analysis. It is hard to completely narrow down the effects of microcredit due to the difficulty in obtaining a pure comparison group. To find a group who are like the recipients of the loan in all ways bar having received the money is difficult, time consuming and expensive. As a result, many studies trying to find the true impact of microcredit have had their findings questioned. A recent analysis of the most widely cited one raises grave doubts about its methodology and conclusions (Roodman and Morduch 2009). These doubts probably apply to some of the other early studies as well.
To truly evaluate the significance of impacts on poverty of microcredit we have to investigate all its effects, not just whether it increase incomes or employment. Receiving loans may improve poor people’s lives without necessarily lifting them out of poverty. Incomes for the poor are often inconsistent and sporadic, especially if reliant on crops or livestock. A regular wage is uncommon. To put food on the table every day, and to meet other basic consumption needs, poor households have to save and borrow constantly (Rosenberg, 2010). For people living below the poverty line on less than two dollars a day services like microcredit can be critical for balancing out their incomes. Those most poverty stricken often need these vital tools just to cope with poverty rather than to escape it. When the poor suffer economic shocks, such as health emergencies, theft or natural disasters (in Bangladesh especially) microfinance can help them balance and smooth their income. This points to an important point about microcredit, the economic vulnerability of those receiving loans can be significantly reduced without seeing a rise in conventional measures of poverty such as average consumption or education. Relative to controls, households eligible for programs have substantially (and significantly) lower variation in consumption and labour supply across the seasons (Morduch 1998). This consequence of microcredit is not often reported on in literature (an exception is Pitt and Khandker, 1998), perhaps because it does not classify as a reduction in poverty, but it is an important advantage of microcredit that can perhaps not be measured.
Sentiment towards microfinance has gone through a shift in recent years, since its conception it has often been regarded as a miracle tool in the battle against poverty, and earlier literature reflects that. However, after many randomized evaluations and studies its success has been questioned. The true impacts of microfinance have often been found to be smaller than previously thought. Households that are entitled to borrow do not seem to demonstrate noticeably increased consumption than any of the control households. Children are not more likely to go to school more often and there is no significant difference to female work hours. CITE.
The length of these recent studies is particularly important in gaining a better understanding, one of the longest and most recent was conducted by Banerjee and Duflo (2015) which analysed the results of a 3 yearlong randomised study following households in Hyderabad. They found a contrasting picture to many previous reports on the role of microfinance. They discovered that many households use their loan to acquire a household durable, reducing avoidable consumption to finance it, whilst some invest in their businesses, but this does not lead to significant growth in the profitability of most businesses (Banerjee and Duflo 2015). Using the same study, they were also able to determine the effect on women’s empowerment and social products of microcredit. By using hypothesis testing they find “there is no prima facie evidence that microcredit leads to important changes in household decision making or in social outcomes. Furthermore, this null effect is not an artefact of observing households only in the very short run.” Moreover, demand for these microloans is not as high as previously thought or as is claimed by many MFIs. Banerjee and Duflo found that in their 2015 study only 33 percent of households borrowed from a microfinance institute, of a sample taken from households with high likelihood of taking credit.
A previously unmentioned and significant point is that of debt traps and the negative social impacts sometimes seen following the use of microcredit. Some MFIs have been condemned for issuing loans with repayment rates that are too high. Often it is the case that the borrowers are unaware of the implications of taking a loan and they find themselves owing large amounts of money. In 2010 in Andhra Pradesh, India after rapid proliferation of for-profit microcredit institutions in the state, accusations of illegal practices, high interest rates, unethical operations and profiteering. After further reports of suicides due to debt traps banks stopped lending to MFIs and politicians called for increased legislation and interest rate ceilings. This problem has been seen elsewhere, where after many years of growth many microfinance institutions are burdened with client over-indebtedness and repayment problems (Attanasio et al., 2015).
Basic estimates of microcredit effect do show clear achievements. For example, the evidence from a study in Bangladesh shows that if households served by the Grameen Bank are ordered by the amounts they have borrowed from the program, the top quarter enjoys 15% higher consumption per capita than households in the bottom quarter. In addition, 62% of the school-age sons of Grameen Bank borrowers are enrolled in school versus 34% of the sons of eligible households that do not borrow. For daughters, the Grameen advantage is 55% versus 40% (Morduch 1998). However, these simple evaluations do appear to be driven by selection bias. When sufficient comparisons are made with control groups we see a different picture. There is no significant increase in consumption per capita or education of children when given access to a MFI. At times, even the levels are lower than the control groups. Households that are eligible to borrow and have access to the programs do not have notably higher consumption levels than control households, and, for the most part, their children are no more likely to be in school. Men also tend to work harder, and women less. (Morduch 1998). These results contradict often made claims about the benefits of these sorts of programs.
Although it has recently been established that microcredit does not necessarily raise the incomes and consumption of its borrowers and their community, and although the conventional storyline that microcredit will lift the poor out of poverty seems to have weakened, there are strong reasons to believe that the poverty stricken value these services more than might be expected. Microcredit is popular among the poor, not only do people withdraw loans they repay them with consistency because they want to continue their access to the service. They are keen to preserve ties with a potential lifeline should they suffer shocks in the future. Repeated use of microcredit by individual borrowers is an advert for its popularity. As long as the indebted number is small relative to the majority of lenders who are helped by the service it is surely better to maintain the business. Richard Rosenberg believes that the lower cost of microcredit relative to other poverty reduction programs gives it an advantage. He writes that based on what we know now, it seems unlikely that a year of micro lending helps poor people as much as a year of girls’ primary education (for instance). The true advantage of microfinance is not that each “dose” is more powerful, but rather that each dose costs much less in subsidies (Rosenberg, 2010).
Still there is much debate about whether microcredit has the power to better the poor and to lift them out of poverty. Microcredit, and microfinance to a larger extent, is an umbrella term covering varying methods and models of lending and the knowledge about the effectiveness of the different mechanisms is slim. The industry is growing and changing, there are unanswered questions which it is necessary to address now before further expansion.