The Economist – The biggest study so far finds that microcredit helps the poor after all

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The Economist – The biggest study so far finds that microcredit helps the poor after all

The Economist – Apr 19th 2014 

For years the reputation of microfinance—which gives tiny loans to the poorest—rose and fell in tandem with relations between Grameen Bank and the Bangladeshi government. In 2006 the bank and its head, Muhammad Yunus, won the Nobel peace prize for reducing poverty and Mr Yunus toyed with setting up a political party, supposedly with the government’s blessing. Since then several studies have found limited or no benefits from microfinance, and in 2011 (for different reasons) a new government forced Mr Yunus to resign from the bank he had founded.

Now the pattern has been broken: on April 6th the government took one more step in its assault on the bank by taking the power to appoint its own board members away from Grameen and giving it to the central bank. This has happened just as the biggest study of microfinance so far, by the World Bank*, rehabilitates the reputation of the practice as a means of helping poor people, especially women.

The new study is distinctive because of its size (it covers more than 3,000 households in 87 villages) and longevity: interviews took place over 20 years. Previous studies have mostly been smaller or just snapshots.

Bangladesh has well over 500 microfinance providers and the survey found that almost a third of rural households are members of more than one. Critics of microfinance argue that borrowing from multiple sources leads to over-indebtedness, trapping people in poverty.

The study find no evidence of that. Rather, borrowing, whether from one institution or several, increases personal expenditure, household assets, the labour supply and children’s education. Moreover, loans do benefit women more than men—as they are designed to.

A 10% increase in men’s borrowing raises household spending by 0.04% and the male labour supply by 0.18% (though the figures are modest, they are significant). Borrowing by women pushes up household spending by one and a half times as much and the female labour supply by nearly three times as much (because even a tiny loan frees women to work who might otherwise be trapped in household chores). It also raises school enrolment rates by eight percentage points. And multiple credit institutions encourage households to diversify their income-earning activities. Bangladesh’s government should look at the study—and stop interfering with Grameen’s efforts to cut poverty.

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