Microfinance

Microcredit helps the entrepreneurial poor

india community meeting

The Economist published an article called, A partial marvel, last month which summarizes the results of various research which evaluates the value of microcredit in helping the poor.  The Net:  Not everything (as expected) is rosy.

Here are a few highlights:

  • Funds still subsidized. 53% of the $11.7B committed to microfinance industry came at rates below-market levels.
    • COMMENT: This is a HUGE change as just 5 years ago that number was probably closer to 90%.  Also, in countries like India, the government mandates that banks lend at a lower rate to those serving the poor, which isn’t all bad.
  • Measuring impact is complicated.  Traditional approaches of having control groups (similar people who are denied loans) and comparing those to those receiving the opportunity (borrowers) are very difficult to implement.  Some also wonder if microcredit is inproportionately allocated to those who are entrepreneurial.
    • COMMENT:  This is all true.  It is very difficult to find comparable groups and then it’s expensive to monitor effects over a long period of time … and deny them the opportunity.  And why is it unfair that those who demonstrate more entrepreneurial skills shouldn’t be trusted with more credit?
  • Few new businesses started. The majority of microcredit loans are used to finance an existing business and not for starting a new business.  Study in Hyderabad showed only 20% of loans funded a new business.
    • COMMENT:  This is my experience as well.  Microcredit loans generally have a standard bell curve distribution where a small % of borrowers are incredibly successful (including starting new businesses), a small % of borrowers actually become worse off and most borrowers do OK.  This is the real world.
  • Functions as seed capital.  “Microcredit clearly allowed more people to overcome the barrier posed by start-up costs [to start or expand a business]” and “By being willing to take a risk on entrepreneurial sorts who lack any other way to start a business, microcredit may help reduce poverty in the longer run.”
    • COMMENT:  I think this is right.  As an entrepreneur myself, I know the huge value of seed capital to get a new business off the ground.  Wealth is built over time, not instantly.

One thought on “Microcredit helps the entrepreneurial poor

  1. “Microcredit clearly allowed more people to overcome the barrier posed by start-up costs [to start or expand a business]” This is helpful only if the interest rates are low but this is not the case most of the times

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