Ethical Performance
inside intelligence for responsible business
 

news

Micro-credit ‘hurts poor’ as much as it helps them

March 2011

Microfinance projects in the developing world make many people poorer, not richer, a major academic study has concluded.

The study by two universities cautions that microfinance should not be seen as a panacea in the fight against poverty,
‘nor as a blanket tool to empower women’.

Researchers from London’s Institute of Education (IOE) and the University of Johannesburg in South Africa say that while the idea of providing small loans and savings accounts to those who have no access to traditional banking services has been hailed as an important way to help people improve their lives, ‘in many cases microfinance not only fails to achieve these aims, it can also damage lives’.

As an example they point to recent news coverage of microfinance projects in India that have led to ‘terrible debt incurred by some borrowers required to pay very high interest rates’. In particular, an overemphasis on encouraging people into entrepreneurship is exposing them to financial risk, say the researchers.

In what they claim is the first systematic review of the available evidence on microfinance, the academics found a mixed picture. Reviewing all the ‘good quality’ research on the impact of microfinance in sub-Saharan Africa – 15 studies in all – they concluded that while there are many plus points, microfinance is doing little to advance the United Nations millennium development goals.

‘Health generally increases and, for some, access to food and nutrition,’ says the report. Yet impacts on education ‘are varied, with limited evidence for positive effects and considerable evidence that micro-credit may be doing harm’. For example, data from Malawi and Zimbabwe showed that micro-credit ‘significantly decreases primary school attendance among borrowers’ children’.

Ruth Stewart of the IOE, who led the study, said that because microfinance debts have to be paid back very quickly, in weekly or monthly payments, they can discourage long-term investments such as the education of clients’ children. ‘Loans, with interest rates often as high as 30 per cent, need to be invested in business which has a quick return,’ she said. ‘In those circumstances it’s not a surprise that borrowers can’t afford to prioritize their children’s education.’

The study says there is too much rhetoric around microfinance, raising false and unrealistic hopes about what it can achieve. It concludes: ‘There may be a need to focus more specifically on providing loans to entrepreneurs, rather than treating everyone as a potential entrepreneur’.

Microfinance can help some people in particular ways, it says, but ‘there is an obligation among donors and policy-makers not to falsely raise expectations’.

Concerns about the unintended negative consequences of microfinance have been growing in recent times. Last year microfinance providers themselves warned of the dangers of over-selling credit to poor people and neglecting the need to encourage savings (EP12, issue 6, p3).




Institute of Education | Global | Responsible Lending

Further Information
http://ethicalp.com/ioe
3BL Media News
Membership
Sign up for Free e-news
Report Alerts
Job Vacancies
eNews
Events Updates
Best Practice Newsletter