Thursday, May 28, 2009

Mixed results on the Microfinance front

Contrary to the attention grabbing headline, the Jury is still out on microfinance. Here is at least some evidence that it does not do all that we hope. That said, the conclusion is definitely more controversial.

The verdict is in on microfinance - PSD Blog - The World Bank Group:
"The results from the first large-scale randomized trial of access to microfinance indicate that it comes up short in many areas of human development. 52 of 104 slums in Hyderabad were randomly selected to receive new branches of a microfinance outfit called Spandana. Abhijit Banerjee and the other randomistas from the Poverty Action Lab describe the results in The Miracle of Microfinance? Evidence from a Randomized Evaluation:

...microcredit does have important effects on business outcomes and the composition of household expenditure. Moreover, these effects differ for different households, in a way consistent with the fact that a household wishing to start a new business must pay a fixed cost to do so. Existing business owners appear to use microcredit to expand their businesses....

[BUT] ... it appears to have no discernible effect on education, health, or womens' empowerment. Of course, after a longer time, when the investment impacts (may) have translated into higher total expenditure for more households, it is possible that impacts on education, health, or womens' empowerment would emerge. However, at least in the short-term (within 15-18 months), microcredit does not appear to be a recipe for changing education, health, or womens' decision-making.:"

The headline aside, the authors correctly point out that 15-18 months is a short a time period to measure dramatic changes. That the loans help the business (which in the longer term would be predicted to positively impact education, wealth, health, and MAYBE women's equality issues), is enough for me to remain skeptical of any article saying the verdict is in.

BTW I included this for completeness and to overcome any bias I have in its favor ;) In my limited personal experience, microloans have worked VERY well. True my experience is limited (I won't count Kiva even thouh that has been positive too!), but locally the loans served their purpose (the borrowers had no access to credit) and the borrowers have made every payment to date.

So, I guess more research is needed to determine what about microfinance works (or under what conditions), and when it does not.

PS read the comments on this one.

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