During the International Year of Microcredit in 2005, the World Bank presented microcredit as an effective tool for fighting hunger and extreme poverty. Thirteen years later, what can we say on the subject? Does microcredit help raise people out of poverty? If not, what are the gaps in its implementation, use, or the debt it creates? Could gifts be a better solution as certain programmes suggest? And how can we be sure? Three researchers have compared these two economic policy options here.
'' Microcredit can increase debt burdens. ''
A socioeconomist at the Centre for Social Science Studies of Africa, American, and Asian Worlds (CESSMA, UMR 245)
'' A massive investment to fight poverty is needed. ''
An economist at the Center for Research in Economics and Statistics Associated with the Jameel Poverty Action Lab
'' Use of microcredit depends on local situations. ''
An economist at the Centre for economic research on development at the University of Antananarivo in Madagascar Resilience Mixed International Research Unit
The answer of Isabelle Guérin
Since the late 1990s, certain studies have shown that microcredit rarely helps people escape poverty. It works well according to other measurements, making certain sectors or territories more dynamic. However, it is often unsuitable and too expensive, coming with regular non-negotiable deadlines. It is mainly used to buy things, take care of health issues, and pay off informal debts. It can therefore increase indebtedness, which is already a significant problem in countries in the Global South with the sky-rocketing prices of raw materials, the privatisation of public services (such as education, healthcare, water, and electricity), the decrease in people growing their own food, the disappearance of shared lands, and increased needs. Consumer finance companies have rolled out their financial logic in emerging countries, reaching even the poorest ones. Indebtedness, which is hard to measure and therefore generally underestimated, has a major role in poverty and forced migration. As for monetary donations, it often comes with conditions and must be used for vaccination or sending children to school as in the Bolsa Família programme in Brazil. These attempts to buy social peace increase the “duties” of mothers and reduce their working time through a lack of complementary efforts to improve public services. Microcredit is also not a better tool for empowering women. Often it gives them too many responsibilities in places where dominating patriarchal standards mean they cannot even own property! The priority should be to reform property laws and establish functioning public infrastructure (especially schools and hospitals) through suitable taxation. Another priority should be establishing a social safety net for when revenues are irregular (e.g., during unemployment and retirement). While we should avoid interference, development aid is justified in supporting this argument.
The answer of Bruno Crépon
Around 2005, microcredit was seen as the economic political tool of the future. Every poor person should be seen as a potential entrepreneur who just needed a microloan to get started. Since then, several randomised assessments?a comparison of the situations of two statistically identical groups, one of whom receives the benefits of a wide-scale programme with limited places, the other not. have undermined this theory. Conducted in several countries in the Global South, these studies have shown that the demand for microfinancing in the population was not as high as expected and that microcredit, on average, did not have an impact on the investment or consumption habits of the most disadvantaged people. At best, the least poor recipients became somewhat richer and the poorest ones did not go deeper into debt. However, one salient fact came out of all of the randomised studies: if money or material resources were “freely” transferred to poor people, the yield was very high. This effect has been observed in many countries. The programme Targeting the Ultra Poor, tested in Ethiopia, Ghana, Honduras, India, Pakistan, and Peru, has been extraordinary effective(1). It combines a useful gift (such as a goat), a training opportunity, and money transfers without any conditions because randomised studies showed that adding conditions was not useful. On the contrary, they showed the need for a massive investment (the so-called “big push”) to end poverty. If support is not significant enough, it does not help people cross the critical threshold from subsistence living to being able to invest or save. The results of the randomised studies often win over policy makers and philanthropists. They therefore play a significant role in the choice of economic instruments for decreasing poverty!
Banerjee, Abhijit et al. “A Multi-Faceted Program Causes Lasting Progress for the Very Poor: Evidence from Six Countries”, Science; 15 mai 2015 ; 348 (6236): 1260799.
The answer of Holimalala Randriamanampisoa
Use of microcredit depends on local situations. The European Union Nopoor project, coordinated by the IRD, has shown that in urban settings in Madagascar, microcredit was mainly used for health expenses or school fees. It counteracts the high price of public services. In rural areas, it is used to acquire means of production and to finance business, but the poorest people are excluded from it for various reasons: the very high interest rates (30 to 40% per year), the rate of repayment which does not take into account agricultural production cycles and requires already having savings, the low education level, and distance from major roads or cities where microfinance institutions are located. There are therefore many factors to consider for financial inclusion?Access to a range of banking and financial services for companies and individuals that meet their needs when their situation prevents them from using normal banking services.! One of the major challenges to the national financial inclusion strategy?All of the national measures implemented to strengthen inclusion. Since 2010, over 30 countries have launched one of these strategies. in Madagascar is reaching the goal for 45% of the population to have access to financial services in 2022 (either traditional services or microfinance) compared to just 12% at the moment. This effort will involve a policy for teaching financial literacy to the people. The government of Madagascar specifically encourages microcredit over donations. The reason is that they hope to promote individual financial responsibility. Moreover, mutualist microfinance institutions are popular in rural areas. The people of Madagascar take their own decisions regarding issues that affect them in a social fabric that is strengthened by debts. Moreover, in Madagascar, international humanitarian aid sometimes combines microcredit and donations, thereby reaching the most impoverished people. These initiatives will act as a path towards accredited microfinance institutions. For over ten years, the government of Madagascar and international organisations have supported a liberal view of microcredit to promote the community’s economic progress. Poor people do not benefit directly because of the lack of infrastructure and a failure to take their various specific situations into account.