Study: Microcredit can be Bane, Not Boon to Self-esteem of Poor

Friday, June 10, 2011

BOSTON (Reuters)- Microcredit lending, which advocates say helps poor entrepreneurs in developing countries succeed and gain confidence, may have little impact on profits and even take a toll on borrowers’ well-being, a new study showed.

Recipients of the small scale loans, typically between $100 to $500, instead reported lower levels of overall well-being, including satisfaction and self esteem, than those denied the loans, according to the study by economists Dean Karlan of Yale University and Jonathan Zinman of Dartmouth College.

Loan recipients also reported less diversification among their business activities — a sign microcredit helps them focus their operations, but not necessarily grow them, Karlan said.

The study, published in the June 10 issue of Science, was based on surveys of nearly 1,000 micro-loan recipients in the Philippines including grocers, food vendors, repair shops and barbers.

“There are clear benefits to microcredit,” said Karlan. “But in this context, it did not lift people out of poverty single-handedly.”

It may be time to rethink microcredit as a household tool rather than solely for enterprise growth, he said. It could serve the needs of the poor by helping someone fix a vehicle or put new floors in a house, for example, Karlan said.

There were some positive outcomes from receiving a microcredit loan for business, according to survey respondents.

They said the loans provided a buffer against income fluctuations, helped them manage unexpected expenses, build their credit worthiness and increase their access to other informal ways to borrow money.

“Microcredit works, but not for the reasons it’s traditionally been sold,” said Karlan.

Source: Reuters (link opens in a new window)