Microfinance: no miracle cure for poverty after all?

Microfinance, an idea that first sprung up in the 1970s, earned its most famous proponent, Muhammad Yunus, a Nobel Peace prize in 2006. The idea that giving small loans to poor people and including them financially, could help lift them out of poverty has spread far and wide. The 2007 global financial crisis may have led to a small bump, but microfinance is on the rise: according to the data from the 2012 Microcredit Summit Campaign, the number of households that have availed a microloan has gone up from 7.6 million in 1997 to 137.5 million in 2010. India is no different. The industry continues to pick up after the SKS Microfinance controversy muddied the industry’s potential. According to the latest data from Microfinance Information Exchange, India currently has 31.3 million borrowers, with loans worth $5.1 billion disbursed.

Esther Duflo and Abhijit Banerji authors ‘Poor Economics,’ the much-cited book on understanding poverty, have published the latest verison of their paper ‘The Miracle of Microfinance? Evidence of a Randomized Trial.’ The updated paper was published last month, the other co-authors being Rachel Kinnerster and Cynthia Kinnan. The paper- a result of a research partnership between the Abdul Latif Jameel Poverty Action Lab (J-PAL) and the Center for Microfinance at IFMR- analyzes the impacts of microfinance when introduced in a new market.  52 slums were randomly selected in a Hyderabad neighborhood, for opening of a branch by microfinance company Spandana, while another 52 slums from the same area were left out. The results from this randomized trial were first reported in 2009, and updated in 2010, the latest update continues to throw up some startling results.

* Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs ), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts.

* Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end.

* We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment.

“The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts,” the authors conclude.

Read the full report here. The 2009 report can be found here.

2 thoughts on “Microfinance: no miracle cure for poverty after all?

  1. Good point. While Microfinance has doubtless provided some value to BoP communitis, its beneficial effects have been vastly overstated. Higher, sustainable incomes are the only way to bring people out of poverty and this requires skill training and job creation on a massive scale. Employement is the way out, not petty entrepreneuralism.

    • Thanks RJ for your comments. One of the lessons from microfinance experience is that single interventions don’t solve the entire problem. This is something that the impact investing advocates should learn quickly, otherwise there will be a lot of disillusioned investors in 5-7 years. Microfinance could never deliver on the expectations built up through the marketing hype created over the years. The same I fear, is happening with impact investing. Our focus at Chilasa is to build sustainable and profitable small businesses in disadvantaged communities that will create quality employment. As you point out this needs to be done on a massive scale. One of the big challenges is that The traditional VC approach is the wrong tool for the job. Unfortunately, this is the model that the impact investment community is largely based upon.

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