Does Microcredit Really Help Poor People?
This paper explores the claim that microfinance can lift millions of people out of poverty.
Although there have been inspiring stories of microentrepreneurs who have used tiny loans to gain financial and social empowerment, scientific testing of microcredit’s impact is difficult. A study that examined year-long financial diaries of poor people from India, Bangladesh and South Africa found that financial instruments are critical survival tools for poor households. Diary households demonstrated their preference for formal microfinance over informal methods. Evidence from millions of clients indicates that:
- Response to microfinance provision from clients who have not had it before is huge, with service providers hardly needing to advertise;
- Clients repay loans with high reliability because they value access to the service;
- Clients find microfinance services valuable and are willing to pay high rates of interest and accept minimal or no return on savings;
- Clients return repeatedly to MFIs.
The true advantage of microfinance is that relatively small, up-front subsidies lead to permanent MFIs that continue providing services year after year with no further subsidy requirement. Further, MFIs can expand their services to reach millions of low-income clients.
