Microlending a Microsuccess?

Posted by Andrew Price

Microlending, as you may know, is the practice of giving very small loans to poor people in developing countries so they can, in theory, start businesses and bootstrap themselves out of poverty for good. The idea that a tiny, temporary financial boost can launch people into entrepreneurial self-sufficiency is an attractive one and microlending has received a lot of attention: Muhammad Yunus won the Nobel Prize for his Grameen Bank in 2005 and Kiva, a microlending nonprofit and GOOD favorite, has seen remarkable growth.But, because the practice is new, there haven't been many objective assessments of how well microlending works. Now we're starting to get them, and it's sobering news:...two new research papers suggest that microcredit is not nearly the powerful tool it has been made out to be. The papers, by leading development economists affiliated with MIT's Jameel Poverty Action Lab, have not yet been published, but they are already being called the most thorough, careful studies yet done on the topic. What they find is that, by most measures, microcredit does not offer a way out of poverty. It helps a few of the more entrepreneurial poor to start up businesses, and at the margins it may boost the profits of existing microenterprises, but that doesn't translate into gains for the borrowers, as measured by indicators like income, spending, health, or education. In fact, most microcredit clients actually spend their borrowed money not on a business, but on household expenses, on paying off other debts or on a relatively big-ticket item like a TV or a daughter's wedding.There are two points to make here. First, this is mostly a case of microlending falling short of insanely high expectations. Microlending may not turn the slums of Dharavi into a Randian paradise, but it isn't doing any harm. In fact, it's working really well in the sense that lots of people are taking-and repaying-the loans. Microfinance is providing temporary money for people who can't get it otherwise. That's important.Second, people who want to help eliminate poverty needn't be scared or discouraged by reports like this-they'll make our efforts stronger. Getting data back is a great way of figuring out how to adjust what you're doing for maximum impact. In that spirit, how might we improve microlending so that it does help people achieve longer-term gains?