Microfinance: Damned with faint praise?

Microfinance is the development panacea of the 21st century. Or so we might believe by the hype and eye-popping expansion of microlenders across the globe. But does microlending actually deliver on development and poverty alleviation?

Amazingly, we have almost no idea. There’s been little hard evidence to go on, even after 20 years of a global microfinance explosion.

Until now. A number of projects, many coming out of IPA or J-PAL, are starting to show experimental results. Dean Karlan presents a new research paper here in Shanghai that (by my reading) damns microfinance with faint praise.

Dean and Jonathan Zinman run a randomized trial of a micro-lending program to small entrepreneurs in Manila–loans equal to about a tenth of their income.

What do they find? Not much in the way of business success; there’s little effect on incomes, savings, and assets (and no impact on more subjective happiness measures). Rather, the number of household economic activities actually decreases, as does the number of household members involved.

They suggest an explanation: after the loan, junior household members switch from the family business into schooling. Loans promote education, not business. So microfinance is good for the household, just not the way we think.

This seems plausible, but (as Dean and Jonathan note) we have to take the schooling result with caution. It is small and somewhat weak, and only appears in the families of a subset of loan recipients –males.

If we run 100 regressions, 10 are going to show up as significant at the 10 percent level, especially as we delve into subgroups. Dean and Jonathan account for this, and do much better than 1 in 10 in their results. This uncertainty, however, is the big argument for more replication. Theirs is just one data point (and fortunately we can look forward to several more in the next few years).

With a single data point, it’s cavalier to suggest all of microfinance is damned with faint praise. But it’s better than pushing microfinance with virtually no data–the state of the world for the last twenty years. I wonder if microfinance blogger David Roodman would agree?

Listen to Dean discussing the results with BBC World.