From the WASHINGTON POST Opinion:
…Few proposals for economic development have been so durable and so celebrated as microcredit — the provision of business loans as small as $100 to the poor. Its appeal has spanned the political spectrum, drawing in the left with its subversive promise to empower women in sexist societies and enticing the right with its emphasis on entrepreneurship and individual responsibility. The World Bank and other lending agencies have bought into it, as have foundations and countless individual donors. In 2006, microcredit became the only economic development idea to win a Nobel Peace Prize, when the laurel went to Muhammad Yunus and Grameen Bank, the financial institution for the poor that he founded in Bangladesh.
There has been enough time and evidencenow to explore the full impact of microcredit in depth, and, set against its vaunted reputation, my verdict is dour: Microcredit rarely transforms lives. Some people do better after getting a small business loan, while some do worse — but very few climb into the middle class. It’s a constructive endeavor, but it has been vastly overhyped. And the hype has undermined the good that the movement can achieve…
The first randomized studies of microcredit appeared in 2009. MIT economists found that in the slums of the megalopolis of Hyderabad, India, small loans caused more families to start micro-businesses such as sewing saris. Existing businesses saw higher profits. But over the 12 to 18 months the researchers tracked, the data revealed no change in bottom-line indicators of poverty, such as household spending and whether children were attending school. Perhaps those who made more from their own businesses earned less in wages outside the home. A study in Manila by American economists Dean Karlan and Jonathan Zinman also found no effect on poverty for families one to two years after they received a loan…
Click here to read the full article.
EDITOR: This is a nuanced and tentative article and should be read in its entirety by those with an interest in the subject matter and with healthy skepticism.
Unfortunately, in India microfinance fell into discredit and came under severe government regulation when ruthless efforts were made to collect past due loans, at times leading to suicide by borrowers.
Whatever these latedy studies show, the Watchdog believes that providing loans to fledgling businesses in general must be desirable. Almost all business persons needed a first loan, be it from a bank, family or friend, to get started. In addition these local lending societies are usually headed by women who benefit from training, experience and improved community status.
The Watchdog and youngest son visited a microfinance group in Guatemala in 2009. They appeared to be successful in manufacturing traditional tapestries which were marketed abroad by others. The women who made up the board seemed very proud of what they were producing and apparently enthusiastic about the program.
