Scott Anderson

Weekly Roundup – Is Microcredit Lost in ‘Transformation’?

“These loans do help, but the changes are not transformative, certainly not transformative enough to justify charitable donations to the standard microcredit model. We have seen, though, that these are viable profit-making products, and so investors interested in a double-bottom line should take note.”

That’s Economist Esther Duflo of the Massachusetts Institute of Technology, a co-founder and co-director of The Abdul Latif Jameel Poverty Action Lab (J-PAL), bottom-lining a half a dozen new studies published in the American Economic Journal: Applied Economics. The six studies, conducted with Innovations for Poverty Action (IPA) in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia and Morocco, were all randomized evaluations (one group receiving microcredit, the other not) and all conducted independently of one another. They conclude that “short-term loans generally do not lead to increased income, investments in children’s schooling, or substantial gains in women’s empowerment for poor borrowers.”

For some, the fact that the studies were conducted by IPA and J-PAL, big influencers in global development economics, has a drop-the-mic, final-word verdict implication for microcredit. And although they were just published/announced on Thursday, reactions have already percolated. But there’s also nuance to be found. Justin Sandefur at the Center for Global Development cautioned against drawing any sweeping conclusions from reports. (In other words: don’t panic social entrepreneurs).

“All six studies find that extending access to microcredit has a big, positive impact on access to credit. This is perhaps not as trivial as it might sound, as it implies microcredit is not exclusively crowding out other lending sources. People who wouldn’t have gotten loans are now getting loans, and when they do, they’re starting new businesses and expanding old ones.

To paraphrase my friend David Roodman in his excellent CGD book on microfinance: if development is freedom, and freedom means a bigger choice set, then microcredit is successful development. People are choosing to borrow and invest in ways they couldn’t before.”

In an interview with Humanosphere, Timothy Ogden, managing director of the Financial Access Initiative at New York University (whom NB interviewed recently), noted the consistency of the findings across multiple countries and a wide variety of financial products. That confirms, in part, what we already know about microcredit’s limitations.

“Microcredit is a useful and generally beneficial product. It is not a one-stop get-out-of-poverty card,” Ogden said. “This research does not say that financial access in general does not help much. It says credit is not sufficient to quickly move people out of poverty permanently.”

The takeaway: though the studies add to the growing body of evidence casting doubt on microcredit’s anti-poverty impact, it will continue to be seen as a tool, not the only tool and not even the most prominent tool, for poverty alleviation. And discussion will surely continue – perhaps a bit more urgently in light of this new research – around ways to broaden the focus of the microfinance sector to better emphasize products, like insurance and savings, that go beyond credit.

Nevertheless, in the short term, critics will pounce, some justifiably, based on the hopeful hype the industry has cultivated over the decades. (We’re looking forward to hosting some of that discussion on NextBillion in the coming weeks.) And these criticisms will likely reference the hot button word in Duflo’s statement: “transformative.” But perhaps some caution is in order. Microcredit is not transformative, but doesn’t that conclusion imply that something else is? Or perhaps Duflo’s definitive language is required to swat down the popular notion of microcredit’s oversized impact, to prod the global development community to move on to something else that comes closer to the sector’s original lofty goals.

Now that would be truly transformative.

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