Finance for Social Good: Are Microloans Truly Empowering the Impoverished?

Over the last decade, microloans and the institutions that provide them have been portrayed as generating substantial benefits in emerging market economies. However, research indicates that these loans have very little short-term impact on communities’ standards of living.

In “Estimating the Impact of Microcredit On Those Who Take It Up: Evidence From a Randomized Experiment in Morocco,” authors Bruno Crépon, Florencia Devoto, Esther Duflo, and William Pariente evaluate the impact of microcredit access in rural Morocco and find that microloans significantly increase average investment, sales, and profits in self-employment activities. However, these increases are offset by the substantial declines in employment income that result from the borrowers moving out of the traditional labor market. Additionally, the authors find that there are no indirect effects on health status or education of children stemming from access to microfinance, nor are there any gains in socioeconomic status for women – externalities that have often been attributed to the availability of microcredit and have motivated individuals and institutions to focus specifically on these subpopulations.

Crépon et al. find that microloans have a substantial impact on borrowers’ self-employment activities, increasing asset holdings by an average of 50 percent, sales by 100 percent, and return on microcredit capital by 140 percent. However, the levels of return are highly variable, with 25 percent of borrowers making negative profits. In addition, take-up of these loans is only around 13 percent, despite the communities having no alternative access to this type of financing. These findings suggest that potential borrowers are hesitant to take on the risk associated with these loans.

Further, the high average level of profits from these self-employment activities is offset by significant declines in income and hours of labor outside the home. Interestingly, time spent in self-employment activities increases, but not significantly, suggesting that borrowers “take the opportunity of access to credit to invest in less labor-intensive occupations and increase their leisure time.” Even more surprising is that microcredit access has a significant negative impact on hours worked outside the home for both borrowers and non-borrowers.

Rather than freeing up opportunities in the labor market for non-borrowers, microcredit appears to change the labor supply decisions of borrowers and non-borrowers in the same way. Although borrowing appears to be too risky for many to take on, the ability to borrow may provide a sense of financial security for non-borrowers, reducing their incentive to increase income or hours worked outside the home.

Other indirect societal effects also appear to refute prevailing beliefs about the impact of microcredit. In particular, there is no significant shift in household consumption composition to suggest increased spending on health or education, nor is there any significant impact on youth education levels, despite a reduction in outside labor for this age group. Further, there is no significant impact on quantitative and qualitative measures of female “empowerment,” such as number of income-generating activities managed by female household members and perceived capacity of women to make decisions. These results may reflect the comparatively low proportion of loans provided to females in this study but are nonetheless important in light of media focus on microcredits’ benefits to women and children.

Despite the portrayal of microfinance institutions as a panacea for disadvantaged people in emerging market economies, Crépon et al. find that access to microcredit provides no significant improvements to community standards of living in the two years after access to credit is obtained. However, a longer evaluation timeframe is necessary to accurately capture the impact of microcredit because it will mitigate the short-term effects of financial volatility and risk aversion on returns and take-up.

Article Source: “Estimating the Impact of Microcredit On Those Who Take It Up: Evidence From a Randomized Experiment in Morocco,” Bruno Crépon, Florencia Devoto, Esther Duflo & William Pariente, National Bureau of Economic Research, Working Paper, May 2014.

Feature Photo: cc/(The Hunger Project)