Are Microcredits really the Rock Star of International Aid?

There is no magical pill that can cure poverty. And that makes fighting against it very frustrating and long- winded. But if someone finds something that sound very good in theory, people start having high expectations of it. The same happened with microcredits.

But what are microcredits exactly?

Basically, microcredits are small loans given to poor people to start their own small business.
You can find a short video explaining microfinance here: How does Microfinance work?

The idea came from Muhammad Yunus, winner of the Nobel Peace Prize in 2006.
In 1976, he worked as an economics professor at Bangladesh’s University of Chittagong. In the close village Jobra he met a young mother that made bamboo stools by hand to earn money. The problem was that she was too poor to buy bamboo herself which would have cost twenty- two cents. She had to borrow it from merchants who set their own prices as a part of the deal. As a result, she only earned two cents from every stool. Yunus realized that once she had twenty- two cents to buy bamboo on her own, she could set the prices like she wants to and then could earn much more. So he lent the money to her out of his own pocket. This is how he got the idea to give people like this young mother small loans so they could start their own businesses.

The idea sounds good, is this maybe the magic pill our world was looking for?

Well… To answer this, one would need clear evidence of the impact of microfinance. The problem is that there is generally a lack of evidence like this. There is often no data whether an aid helped or not.

Cynthia Kinnan, Abhijit Bannerjee, Esther Duflo and Rachel Glennerster propose to use randomized controlled trial techniques, which is same approach that is used to test new medication, so they can compare a group of people who used such a loan to a group of people under identical conditions who did not use a microcredit. The resulting data could deliver the needed evidence.The findings were published in April 2013 in a report you can find here: Report from April 2013 .To summarize the report very shortly, microcredits does not “paint a picture of dramatic changes in basic development outcomes for poor families,” according to Kinnan. The results maybe will disappoint some people, but the truth is that most things just need their time. And the test was “only” carried out for three years. As Abhijit Bannerjee said: “Poverty has been with us for thousands of years. If we have to wait another 50 to 100 to eradicate it, so be it.”

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One comment

  1. natestnwsk · · Reply

    wow… very revealing post!
    It’s interesting to learn how Yunus came to start his Grameen Bank.
    I read earlier on that despite a lot of criticism due to corruption affaires the microfinance system would work really well because the borrowers, mostly women, only can borrow as a group of people. Thus, there’s peer pressure to pay back the loans and as a result the repayment rate of the Grameen Bank is surprisingly high. Find this, too, an interesting aspect.
    Well done 🙂 Nate

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