The authors of the two studies say that microcredit does help the profit margins of micro-businesses that receives the loans, but that does not translate into better quality of life for the borrowers. The studies say that the borrowers do not enjoy greater health, income or more education.
Microcredit's defenders say that the studies have too short of time frame to prove anything. The studies were conducted over a two year period. Microcredit apologists say that the true effects of the loans are over a longer period of time.
From the Boston Globe, reporter Drake Bennett tells us how the studies were conducted.
At least one author of each of the papers is affiliated with MIT’s Poverty Action Lab, a research center that brings together economists with a determinedly experimental bent. In particular, its researchers all share a belief in randomized controlled trials - the same sort of test that new drugs have to undergo - as a tool for evaluating poverty alleviation measures.
Karlan and his co-author, Jonathan Zinman, an associate economics professor at Dartmouth, looked at a bank in the Philippines that offered microloans. They created their controlled experiment by altering the algorithm the bank used to evaluate creditworthiness so that some borderline applicants were randomly denied loans while other otherwise identical applicants had loans approved. The researchers then followed up with the borrowers and nonborrowers to see what difference the loan had made.
The answer was not much. Neither household income nor spending rose for those who got microloans. And borrowers who did put the money into their businesses - instead of using it, as many did, for household expenses - actually shrank rather than grew their businesses. Karlan and Zinman suggest that this might be because the business owners were taking advantage of the loan to fire unproductive workers to whom they owed financial favors, and those firings seemed to explain the very small gains in profit Karlan and Zinman found. In addition, the gains accrued only to male entrepreneurs, not the women usually targeted by microcredit programs.
The second study, co-authored by Abhijit Banerjee and Esther Duflo, economics professors at MIT, along with Rachel Glennerster, executive director of the Poverty Action Lab, and an MIT economics doctoral student named Cynthia Kinnan, found a slightly larger impact, though a selective one. Working with a microcredit bank in India that was looking to expand in the city of Hyderabad, the researchers did find some small positive effects. Borrowers who already had a business did see some increase in profit. Households without businesses that the researchers judged more predisposed to start one were found to cut back on spending, suggesting they were saving to augment their loan for a capital business expense like a pushcart or a sewing machine. The researchers also found small but encouraging shifts in household spending across the board, with less money spent on “temptation goods” like alcohol, tobacco, and gambling.
Still, overall household spending - a key indicator of financial well-being - stayed about the same. And the researchers found no effect on children’s health or education levels, and the women in the borrower homes were no more likely to play a role in household decisions than those in the control group.
To Duflo, this only seems disappointing because expectations for microcredit are so high.
“I don’t see this as a negative finding,” she says. When asked why she thinks microcredit didn’t boost health and education outcomes, she says, “I would really ask the question, ‘Why did we expect all these things to happen?’ If you give people access to a financial instrument, it’s like any other instrument. It’s useful, but it’s not like the miracle drug to end poverty.”
We take the side of microcredit in this debate. Microcredit can help the people who receive the loans and it's effects only will accumulate for the next generation and the next. The loan reciepient will be able to make enough margin from their micro-business to keep their children in school. The children will in turn receive a better education and will be able to earn more money.
Besides, the continued growth of microcredit through the global recession is proof enough.