The impact of microcredit is the study of microcredit and its impact on poverty reduction which is a subject of much controversy. Proponents state that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. In the US and Canada, it is argued that microcredit helps recipients to graduate from welfare programs. Critics say that microcredit has not increased incomes, but has driven poor households into a debt trap, in some cases even leading to suicide. They add that the money from loans is often used for durable consumer goods or consumption instead of being used for productive investments, that it fails to empower women, and that it has not improved health or education.
The available evidence indicates that in many cases microcredit has facilitated the creation and the growth of businesses. It has often generated self-employment, but it has not necessarily increased incomes after interest payments. In some cases it has driven borrowers into debt traps. In addition, it can produce unintended rent-seeking entrepreneurship. There is no evidence that microcredit has empowered women. In short, microcredit has achieved much less than what its proponents said it would achieve, but its negative impacts have not been as drastic as some critics have argued. Microcredit is just one factor influencing the success of a small businesses, whose success is influenced to a much larger extent by how much an economy or a particular market grows. A critical review of 58 papers covering experiences in 18 countries concluded "there is no good evidence for the beneficent impact of microfinance on the well-being of poor people" and that "the greatest impacts are reported by studies with the weakest designs".
The attempt to objectively evaluate the impact of microcredit on a global or a local scale is marred by numerous methodological challenges. There are only few rigorous evaluations of microcredit,The title quotes from Jonathan Morduch's comments made at Innovations for Poverty Action/Financial Access Initiative(IPA/FAI) Microfinance Conference, Oct. 17, 2008. and much of the literature on the impact of microcredit is based in anecdotal reports or case studies that are not representative. Even among the rigorous evaluations many "suffer from weak methodologies and inadequate data", according to a systematic literature review of the impact of microcredit conducted in 2011 by a group of researchers on behalf of UKAid. A 2008 review of over 100 articles on microcredit found that only 6 used enough quantitative data to be representative, and none employed rigorous methods such as randomized control trials. Rigorous impact evaluations using control and treatment groups are difficult to undertake today, because microcredit is so common in developing countries today that few locations remain where such a research setting can still be applied. Further complicating impact studies is the often highly politicized context of poverty alleviation initiatives.
Income and poverty
Among 6 representative studies selected from a sample of more than 100 studies as being methodologically most sound, five found no evidence that microcredit reduced poverty, although they found other positive impacts.Westover J. (2008). The Record of Microfinance: The Effectiveness/Ineffectiveness of Microfinance Programs as a Means of Alleviating Poverty . Electronic Journal of Sociology. Quote:"Some studies have found marked decreases in overall poverty levels, including declining levels of extreme poverty (Khandker, 2005), while other studies do not find the same direct effect (Morris and Barnes, 2005; Kan, Olds, and Kah, 2005; Goetz and Gupta, 1996). Still, other studies provide mixed results (Copestake, Bhalotra, and Johnson, 2001; Morduch, 1998)."
The first randomized evaluation of the impact of introducing microcredit in a new market has been undertaken by Abhijit Banerjee of the M.I.T. Poverty Action Lab in slums in Hyderabad, India, in 2008. It compared two groups of randomly selected slums. In the treatment group banks opened branches that provided microcredits, while in the control group this was not the case. The study showed that fifteen to 18 months after lending began, there was no effect on average monthly expenditure per capita, but expenditure on durable goods increased. Consumption thus shifted from consumables to durable goods. Also, the number of new businesses increased by one third, but they were not very profitable. Pulitzer prize winner Nicholas Kristof quotes another study by Abhijit Banerjee and Esther Duflo covering loans by Spandana in India. In this case, loans were also used to buy durable goods, but in addition they were used to expand existing businesses.
Tazul Islam argues that the Grameen Bank does not reach the poorest, since the clients of the bank tend to be clustered around the poverty line of predominantly moderately poor or vulnerable non-poor. Of the poor who join Grameen bank's microcredit program, a high percentage often drop out after only a few loan cycles, while many others eventually drop out in later loan cycles as loan amounts begin to exceed their repayment capacity. Nevertheless, he concludes that microcredit in Bangladesh had a "positive impact on enterprise and household income and asset accumulation". Microloans in Canada have allowed small business owners to make their businesses their primary source of income with 67% of the borrowers showing a significant increase in their income as a result of their participation in certain micro-loan programs.
A film by the Danish journalist Tom Heinemann, The Micro Debt, alleges that microcredit in Bangladesh had little impact on poverty. The film highlighted the purported continued poverty of Sufiya Begum, the original loan recipient of Grameen, in Jobra Village. After a thorough investigation in December 2010 by the Norwegian Foreign Ministry, the alleged problems have been proven to be false. Documentary maker Gayle Ferraro found the woman alive and well, confirming the original Grameen story.
Milford Bateman, the author of Why Doesn't Microfinance Work?, argues that microcredit offers only an "illusion of poverty reduction". "As in any lottery or game of chance, a few in poverty do manage to establish microenterprises that produce a decent living," he argues, but "these isolated and often temporary positives are swamped by the largely overlooked negatives." Bateman concludes that "The international development community is now faced with the reality that, overall, microfinance has been a development policy blunder of quite historic proportions."
Professor Anu Muhammad of Jahangirnagar University in Bangladesh, a Marxist and critic of microcredit, claims that "according to different studies" which he does not name, "you cannot find more than 5–10 per cent people who could change their economic conditions through micro-credit."
German journalist Kathrin Hartmann relates tales of women who she met in 2012 while visiting Kurigram District in Bangladesh trapped in debt. She was told by rural women of brutal methods to enforce debt repayments, including the forced sale of goats, cows, house utensils and land. She also describes intense peer pressure under group lending schemes. Heavily indebted men and women even sold their kidneys to organized groups in order to be able to repay loans, as discovered by the police in summer 2011. Hartmann writes, without quoting a source, that one third of microcredits are taken in order to pay for food or health care, especially during the times of the year called Monga when food and work opportunities are scarcest. Children drop out of school to earn money and families cut down on food expenses in order to repay loans. When natural disasters strike, such as Cyclone Sidr in 2007, weekly instalments to repay loans continue, although the ability of borrowers to earn income has been destroyed by the disasters.Kathrin Hartmann:"Erlösen kann uns nur der Tod" ("Only Death Can Save Us"), Frankfurter Rundschau, 30 August 2012
A study in the Philippines by Dean Karlan of Yale University and of Innovations for Poverty Action compared a treatment group, financed through microcredit, and a control group that did not receive microcredit, in Manila. In this case many microcredits were loaned to people with existing businesses. The businesses became more profitable, but laid off unproductive employees including friends and relatives that they previously had felt obliged to employ. Male-owned businesses increased profits, but female-owned businesses did not.Karlan, Dean S., and Jonathan Zinman. 2011. "List Randomization for Sensitive Behavior: An Application for Measuring Use of Loan Proceeds.", Journal of Development Economics 2012. For a brief summary see: Poverty Action Lab:Measuring the Impact of Microcredit and Interest Rate Sensitivity in the Philippines
Debt traps, suicides and group pressure In 2008, economist Jonathan Morduch of New York University noted there were still major gaps in research on microcredit, such as on debt traps and the use of microcredits for consumption.
There has been much criticism of the high interest rates charged to borrowers. The real average portfolio yield cited by the sample of 704 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006 was 22.3% annually. However, annual rates charged to clients are higher, as they also include local inflation and the bad debt expenses of the microfinance institution. Interest rates charged by the Mexican Banco Compartamos on their micro-loans reached 86% per year while it sold stocks in the stock market in 2007.Businessweek Online Extra: Yunus Blasts Compartamos
In India microfinance institutions have been criticized for creating small-debt traps for the poor in Andhra Pradesh with high interest rates and coercive methods of recovery. Villagers often did not know the interest that they were being charged and were not aware of the consequences of taking multiple loans as they take the second loan to clear the first loan. retrieved on 13 February 2012 In 2010 aggressive lending by microcredit institutions has been blamed for over 80 suicides in Andhra Pradesh. Bangladesh's former Finance and Planning Minister M. Saifur Rahman charged in 2005 that some microfinance institutions use excessive interest rates.Bangladesh Strategic and Development Forum:Saifur takes swipe at micro-credit, 21 November 2005, retrieved on 13 February 2012 A 2008 study in Bangladesh showed that some loan recipients sink into a cycle of debt, using a microloan from one organization to meet interest obligations from another. Field officers who are in a position of power locally and are remunerated based on repayment rates sometimes use coercive and even violent tactics to collect instalments on the microloans.
Private banks and large MNCs have become involved in microfinance. With large corporations investing, local MFIs are under pressure to deliver high returns each quarter; this comes at the expense of borrowers. Foreign and corporate capital investment take advantage of emerging and developing economies across Asia and Africa, introducing new forms of collateral requirements; individuals borrowers sometimes end up in even more debilitating debt and poverty than when they started.