A Partial Marvel: Microcredit may not work wonders but it does help the entrepreneurial poor

The Economist; 18 July 2009.

Has microcredit delivered on its promise to lift borrowers out of poverty? Academics have had a hard time finding evidence to answer this question. Part of the challenge of studying the impact of microcredit is selection bias. A scientific survey requires that you compare those who get a microcredit loan with a control group of similar people facing the exact same economic hardships and external market constraints. Microcredit loans may be selectively offered to only the most entrepreneurial in a community. If that is the case, then part of the impact of microcredit to alleviate poverty may be overstated.

Just recently, two academic studies claim to have overcome the challenges of selection bias and conducted controlled experiments. Abhijit Banerjee and his team from the Poverty Action Lab at MIT ran a controlled experiment in Hyberdad, India. Their report, “The miracle of Microfinance? Evidence from a Randomised Evaluation,” indicates that microcredit does not significantly lift borrowers out of poverty. Another research team led by Dean Karlan of Yale University and Jonathan Zinman of Dartmouth found similar results in the Philippines. Their report, “Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila,” established that microcredit did not lead to increases in family purchases within a year and a half of the original loan. Some argue that this research is too short-sighted. Microcredit bridges the risk divide that prevents commercial banks from funding economic activity for the very poor. Microcredit loans signal the creditworthiness of borrowers to the broader marketplace. It would take more than a year and a half to see that creditworthiness translated into increases in household consumption. The Economist concurs: “By being willing to take a risk on entrepreneurial sorts who lack any other way to start a business, microcredit may help reduce poverty in the long run, even if its short-run effects are negligible.”

For the full article see: www.economist.com/displayStory.cfm?story_id=14031284

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