Microfinance and Poverty II – Changing Consumption Patterns
In the last blog entry “Microfinance and Poverty I – Hype and Crisis” I have written about the hot debate on the impact of Microfinance on poor communities. On the one hand, its proponents celebrate Microfinance as an effective development tool, giving poor people the opportunity to start their own business and become self-sustainable. On the other hand, its opponents vilify Microfinance, as an industry responsible for trapping communities in vicious circles of debt. Lets now move away from this ideological towards a more balanced, facts based view of some scientists.
Today, many researchers from institutions across the world try to inform the ideologically loaded debate on the impact of Microfinance on poverty with their research. Due to a lack of transparence and data, it is very hard for them to find causal relationships between microfinance and typical measurements of development.
Randomized, controlled trials are rare and very difficult to implement. Still, there is some interesting new evidence on the impact of Microfinance on poverty. An assessment of six independent randomized controlled trials across the world by Abhijit Banerjee (MIT), Dean Karlan (Yale), and Jonathan Zinman (Dartmouth) from 2015 suggests the following: Microfinance has a small positive effect only on the income of borrowers with preexisting businesses. There is no evidence that income of borrowers without a preexisting business goes up after taking out a Microcredit. This suggests that Microcredits are not a very effective tool for stimulating entrepreneurial activity. And if it is, it works only for those borrowers who already own preexisting businesses, and not for the extremely poor. These findings contradict the main claims of Microfinance advocates, pretending that every poor person can become a successful businesswoman if she is just given the opportunity.
On the other hand, Microfinance also doesn’t usually seem to create the debt-traps that its opponents are so worried about. Evidence shows that, not surprisingly, borrowers are likely to use the credits to purchase more expensive, long-term goods, which they never had the opportunity to buy before. The rhetoric of the MFIs suggests that the debt would then be repaid by the increase in income flowing from those purchases. But what happens if income doesn’t increase? Do borrowers really take out another credit to pay off the first one, creating the vicious circle of debt described above?
Interestingly, this doesn’t seem to be the case. Instead, MFI clients tend to pay off their debt by decreasing day-to-day consumption over the time where the credit is paid back. Therefore, Microfinance could lead to a shift in consumption from short-term to more long-term goods.
During the Mi-fi Day on the 19th of April at the University of Zürich, the effect of Microfinance on development was discussed in more depth in workshops, presentations and a podiums discussion. One workshop offered by Oikocredit, Kawien Ziedses des Plantes, head of capacity building and communications at Oikocredit International, was focusing on how impact is measured in the oldest and one of the biggest Microfinance investment funds in the world.
So if Microcredits don’t increase income, what happens to those whose current income isn’t even high enough to pay back the interest rates? How can we create credit opportunities for the world’s extremely poor? I will be writing about one approach, put in practice by the Swiss Catholic Lenten Fund (Fastenopfer) in the Senegal in the last blog of the series “Microfinance and Poverty”.
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