Featured Research

from universities, journals, and other organizations

The downside -- and surprising upside –- of microcredit

Date:
June 10, 2011
Source:
Yale University
Summary:
Microcredit, which involves giving small loans to very small businesses in an effort to promote entrepreneurship, has been widely touted as a way to reduce poverty and stimulate economic growth. But in a new study, researchers find that the practice may not be an efficient tool in promoting business growth or improving the lives of its beneficiaries, but could instead have just the opposite effect. However, they did discover other surprising advantages.

Microcredit, which involves giving small loans to very small businesses in an effort to promote entrepreneurship, has been widely touted as a way to reduce poverty and stimulate economic growth. A multitude of both non- and for-profit institutions are spending billions of dollars each year on microcredit ventures in developing nations around the globe.

But just how effective is microcredit lending? In a new study, researchers find that the practice may not be an efficient tool in promoting business growth or improving the lives of its beneficiaries, but could instead have just the opposite effect. However, they discovered other surprising advantages.

Economists Dean Karlan of Yale University and Jonathan Zinman of Dartmouth College conducted a study of microloans given out to nearly 1,000 small business owners and entrepreneurs in the Philippines. They found that, contrary to widely held beliefs, the loans did not generate bigger businesses, higher income, or greater subjective well-being for the recipients. Instead, the loans led to fewer businesses and a lesser sense of well-being. However, the practice did result in stronger risk management.

"This study suggests that microcredit works through complex mechanisms that are not entirely understood, and it's clear that we can't set policies and make decisions based on our intuition about what microcredit accomplishes," Karlan said. "We need a better understanding of how this strategy works, based on sound data and analysis."

Karlan and Zinman developed a new method for evaluating the impact of microcredit lending, working in partnership with First Macro Bank, which made loans to 921 men and women in the Manila area. The team randomly approved loans for a subset of applicants who had been pre-selected based on their credit scores and who were considered "marginally creditworthy." These types of people, and especially the women among them, are often cited as the most likely to benefit from microcredit lending.

The team gave loans ranging from about $100 to $500, with an average monthly interest rate of 2.5%. Typical businesses supported by the loans included small grocery/convenience stores, food vendors, auto and tire repair shops, tailors and barbershops/salons.

Researchers conducted follow-up surveys with the loan recipients 11 to 22 months after they had applied for the loans. The surveys showed that the entrepreneurs who received loans actually shrank, rather than grew, their number of business activities, and that their self-reported sense of well-being (including life satisfaction, self-esteem, optimism and stress levels) did not improve, but in fact got slightly worse.

However, they also discovered that the loans did provide a buffer against income fluctuations and unexpected expenses, allowing the recipients to manage risk without relying on formal insurance. The small business owners' access to informal credit, such as financial assistance from friends and family, also increased as a result of the loans.

"Rethinking microcredit as a tool for the household, rather than merely as a tool for enterprise growth, is clearly the first step in the right direction to understanding the impacts of microcredit," Karlan said. "We hope our methodology can provide a model for others to conduct similar research in other settings and help provide a clearer picture of whether and how microcredit works."

The study appears in the June 10 issue of the journal Science.


Story Source:

The above story is based on materials provided by Yale University. The original article was written by Suzanne Taylor Muzzin. Note: Materials may be edited for content and length.


Journal Reference:

  1. Dean Karlan, Jonathan Zinman. Microcredit in Theory and Practice: Using Randomized Credit Scoring for Impact Evaluation. Science, 10 June 2011: Vol. 332 no. 6035 pp. 1278-1284 DOI: 10.1126/science.1200138

Cite This Page:

Yale University. "The downside -- and surprising upside –- of microcredit." ScienceDaily. ScienceDaily, 10 June 2011. <www.sciencedaily.com/releases/2011/06/110609141546.htm>.
Yale University. (2011, June 10). The downside -- and surprising upside –- of microcredit. ScienceDaily. Retrieved July 22, 2014 from www.sciencedaily.com/releases/2011/06/110609141546.htm
Yale University. "The downside -- and surprising upside –- of microcredit." ScienceDaily. www.sciencedaily.com/releases/2011/06/110609141546.htm (accessed July 22, 2014).

Share This




More Science & Society News

Tuesday, July 22, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

What Self-Made Women Need to Know Financially Before Getting Hitched

What Self-Made Women Need to Know Financially Before Getting Hitched

TheStreet (July 21, 2014) Halle Berry was recently ordered to pay her ex-boyfriend Gabriel Aubry $16,000 a month in child support by a California judge for their daughter Nahla. As women make strides in the workforce, they are increasingly left holding the bag when relationships end regardless of marital status. 'What Monied Women Need to Know Before Getting Married or Cohabitating' discusses information such as debt incurred during the marriage is both spouse's responsibility at divorce, whether after ten years of marriage spouses are entitled to half of everything and why property acquired within the marriage is fair game without a pre-nup. Video provided by TheStreet
Powered by NewsLook.com
$23.6 Billion Awarded To Widow In Smoking Lawsuit

$23.6 Billion Awarded To Widow In Smoking Lawsuit

Newsy (July 20, 2014) Cynthia Robinson claims R.J. Reynolds Tobacco Company hid the health and addiction risks of its products, leading to the death of her husband in 1996. Video provided by Newsy
Powered by NewsLook.com
Clock Ticks Down on Internet Speed Debate

Clock Ticks Down on Internet Speed Debate

Reuters - US Online Video (July 18, 2014) The FCC received more than 800,000 comments on whether and how internet speeds should be regulated, even crashing its system. Lily Jamali reports. Video provided by Reuters
Powered by NewsLook.com
Raw: Wildfire Tears Through Washington

Raw: Wildfire Tears Through Washington

AP (July 18, 2014) A large wildfire continued to gain steam through north-central Washington Friday. The blaze is already responsible for the destruction of at least 100 homes. (July 18) Video provided by AP
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins