Microfinance, the practice of providing stripped-down financial products to the poor — almost always loans — has long been the focus of favourable attention. The UN declared 2005 the International Year of Microcredit; and the most celebrated microfinance institution, Grameen Bank, shared the Nobel peace prize with its founder, Muhammad Yunus, in 2006.
Grameen was born in Bangladesh in 1976 after Yunus had discovered that local craftswomen were being charged outrageous rates on their loans to buy raw materials. Village moneylenders charged up to 10 per cent interest per day — enough to make a one-cent debt swell to the size of the US economy in about a year.
Yunus began lending money and discovered that the women were capable of investing his loans, lifting themselves out
of poverty and paying him back with superb reliability. "All people are entrepreneurs," he proclaimed.
It is an inspiring story, and microfinance is now a global movement with about $25bn of loans outstanding to perhaps 150 million customers. But a backlash has begun — notably, an article in the Boston Globe last year, subtitled "Billions of dollars and a Nobel prize later, it looks like 'microlending' doesn't actually do much to fight poverty." Other media have weighed in. The scepticism has been provoked by three important studies unveiled last year.
All three were randomised controlled trials, the social scientist's equivalent of a clinical drug trial. In one trial, economists Dean Karlan and Jonathan Zinman found the discomfiting result that a Manila microfinance programme aimed at low to middle-income borrowers helped male-owned businesses to become more profitable, but not those owned by women. This contradicts a strong tradition in microfinance.
A second trial, conducted by four economists at MIT, studied a more traditional microcredit scheme in India, which lent to groups of very poor women. The results were respectable but nothing more. The loans were useful for managing household cash flow but performed no miracles - they did not increase income, health or women's empowerment.
Modestly positive results do not justify a full-blown backlash. We should have been more sceptical of heady tales about the miracle of microfinance from the start. Nobody would claim that the wealth of the US is built largely on the ready availability of credit cards, after all. And a third trial (by Pascaline Dupas and Jonathan Robinson) of a microsavings scheme in rural Kenya, found that the savings accounts helped rural women save, invest in businesses, ultimately spend more and cope when bad luck hit them.
Microfinance fans should embrace more such trials as a way of learning what works. More trials are on the way — and not before time.
Tim Harford's latest book, Dear Undercover Economist, is out in paperback next month. BUY IT HERE:Dear Undercover Economist: The Very Best Letters from the "Dear Economist" Column: The Undercover Economist Solves Life's Everyday Mysteries and Problems
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