Tanvi Misra is a staff writer for CityLab covering immigrant communities, housing, economic inequality, and culture. She also authors Navigator, a weekly newsletter for urban explorers (subscribe here). Her work also appears in The Atlantic, NPR, and BBC.
Yes, but they don't pull people out of poverty.
Microloans are small amounts of money lent to people all over the world whose needs aren't met by the formal banking system. Their role as a tool for poverty alleviation has been at the center of some debate. Now, six new studies have mounted evidence that microloans aren't as effective as previously thought.
Researchers at Innovations for Poverty Action and The Abdul Latif Jameel Poverty Action Lab at MIT conducted studies in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia and Morocco. They found that while microloans did improve small business ownership and investment, they did not cause long-term increases in income.
“What we find is that modest changes do take place, but [microcredit] is not the transformative tool that it was often pushed as,” says Dean Karlan, an economist at Yale University and founder of the Innovations for Poverty Action.
For example, in Mexico, an increase in access to small loans didn't increase profits for business owners. And since these borrowers eventually had to repay the loan, their household consumption decreased over a period of time. The researchers also found that microcredit didn't have much effect on school enrollment or women's empowerment—other social benefits it's been expected to provide.
"The question you want to ask is, 'What's most cost-effective from a donor's perspective?' " says Karlan. "Everything has a trade-off."
But what about the lending organizations on the ground—should they close up shop? Karlan says no. They're doing exactly what they promised to investors: making money and creating some good while they’re at it. For instance, the studies also found that, in Mexico, microcredit helped women pay off their debts.
These "modest" positive benefits, scaled over millions of people, is a huge deal, says Alex Counts, the president of the Grameen Foundation, an organization that has been supporting microfinance in developing countries since 1997.
"I think in international development, we tend to go with fads," says Counts. "We say bed-nets are the magical solution, and then we throw them away." Instead of discarding microfinance, he says, organizations like Grameen Foundation and Kiva (which also gives microloans to Americans) can tweak existing strategies, update lending models, and experiment with new ideas.
"What we're trying to distill from all of these studies is … how do we make this thing work better?" says Counts.