Credit crisis: does microfinance benefit the very poor?

Does lending to the poor increase their incomes? Do certain ways of lending have more impact on poverty than others? Research by the Universities of Manchester and Reading found that loans to the not-so-poor had more of a positive impact on income than loans to the very poor. However, some lending methods have more impact than others, and could be adopted by microcredit programmes to increase their impact on poverty.

Microcredit programmes aim to help the poor generate income and are very popular with donors. It is thought that micro-credit can alleviate poverty in a self-sustaining way. Yet, despite the popularity of micro credit, little is known about its real affect on poverty. Most studies look primarily at how many loans are made and whether or not they are repaid. The very existence of loans is taken as proof that the poor are being reached and their repayment as evidence that incomes have increased. Does micro-credit really reach the very poor? Does it help alleviate poverty and generate added income? The research measured financial performance and the impact on income of thirteen microcredit institutions in seven countries.

The sustainability of different microcredit schemes differs from one institution to the next. Findings suggested that:

• The more sustainable programmes were able to charge market interest rates, save and take out insurance plans, collect loans frequently, and provide incentives to borrowers and staff to encourage repayment.
• Loans to higher-income families had more impact on poverty than loans to the very poor.
• The more self-sustaining organisations had a greater impact on poverty at all levels than the less sustainable ones.
• The very poor are less willing to take risks because if they fall into debt they would have to sell their assets and be even worse off than before. They only therefore take out small loans and usually for food.

What does this mean for policy? Is there a conflict between growth and poverty alleviation?

• Lenders can either focus on the very poor and accept that this will limit the outreach that they are able to achieve or focus on the not-so-poor and achieve a greater impact.
• If finance projects become more sustainable, this may have an increased impact on poverty and provide greater financial stability.
• Micro credit programmes need to consider adopting flexible repayment for consumption loans to help alleviate poverty.
• Innovative methods of providing financial services to the poor need to be pursued. Contemporary models of microcredit can help the economically active poor but a broader set of services would help larger numbers of poor and very poor people improve their livelihoods.

Source(s):
‘Microenterprise finance: is there a conflict between growth and poverty alleviation?’ World Development Vol. 26/5 by Paul Mosley and David Hulme (1998)

Funded by: UK Department for International Development (ESCOR) 1992-1995

id21 Research Highlight: 21 August 2000

Further Information:
David Hulme
Institute for Development Policy and Management
University of Manchester
Oxford Road
Manchester M13 9GH, UK

Tel: +44 (0)161 2752809
Fax: +44 (0)161 273 8829
Contact the contributor: david.hulme@man.ac.uk

University of Manchester

Other related links:
Search Eldis for sources on microcredit