Economists Demonstrate One Size Does Not Fit All for Microfinance Programs
Thursday, March 22, 2012
CHICAGO, March 21, 2012 /PRNewswire via COMTEX/ — New Study Reveals Wide Variance in Results from Thai Million Baht Village Fund
Large-scale microfinance programs are widely used as a tool to fight poverty in developing countries, but a recent study from the Consortium on Financial Systems and Poverty suggests that they can have varying results for participants and may be the most cost-effective use of funds only in limited situations.
The Thai Million Baht Village Fund is one of the largest government microfinance initiatives of its kind. Beginning in 2001, Thailand transferred one million Thai baht ($1.8 billion) in government funds to create almost 80,000 village banks throughout the country. Their goal was to increase credit and stimulate the economy.
The study, by economists Joseph P. Kaboski of the University of Notre Dame and Robert M. Townsend of the Massachusetts Institute of Technology and published in a recent issue of Econometrica, notes that, overall, households increased their borrowing and their consumption roughly one for one with each dollar put into the fund. Yet, the authors also report, there was considerable variance in how individual households were affected by the available credit.
Some of the least affluent households financed their current needs with the additional available credit and did not invest it. Other households didn’t borrow any money but increased their consumption; this is likely because their awareness of the available credit made them more comfortable dipping into their “rainy day” savings. Still others reduced their consumption in order to save up for larger investments, and they ended up gaining substantially.
The authors also identify two major differences between the effectiveness of microfinance programs like the Thai fund and direct transfer programs. First, a large-scale microfinance program is potentially less beneficial because households face the interest costs associated with the increased credit. As households borrow more and carry more debt, they are left with larger interest payments. Interest costs remain particularly high for otherwise defaulting households whose debts grow with the more liberal borrowing limit.