Not long ago, "microlending" was the world's hottest poverty-fighting tactic—the UN even declared 2005 to be the "International Year of Microcredit." Now, a barrage of new studies say that microcredit isn't as great as everyone thought it was.
Microcredit involving relatively small loans to very poor people around the world has been touted as a smart way to open the doors of entrepreneurship to the poor, allowing them to, in effect, pull themselves up by their own bootstraps. Muhammad Yunus, the founder of the microlending firm Grameen Bank, won the Nobel Peace Prize in 2006 for his work in the field.
It seems clear that microlending can be good business. But is it really an effective area of focus for charities and nonprofits, whose primary goal is not to make a monetary return on their investments, but to alleviate poverty?
The studies, conducted by researchers affiliated with Innovations for Poverty Action (IPA) andThe Abdul Latif Jameel Poverty Action Lab (J-PAL), conclude that while microloans can increase small business ownership and investment, the small, 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.
"The studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators," the introductory paper to the studies reads.
This is not so hard to believe: the idea that tiny loans could effectively catapult large numbers of poor people into the ranks of the middle class defies common sense, when you think about the sorts of very modest business activities that these loans could support (even in the best case scenarios), and the modest incomes those businesses would produce.
Tiny lines of credit are no match for strong, large-scale economic growth—or for redistributing the economic growth that we already have to more people who have less.