Not Enough Room For Tweaks
How to explain it? Abhijit Banerjee, an economist at MIT and another author of prominent studies of microfinance, says in theory these findings suggest that extremely poor people served by microloans are somehow inherently bad at business. But he notes that other studies have found that poor people can substantially boost their income if they’re given a cash grant or a free asset – for example, some livestock – to use in a business. So Banerjee argues a better explanation could be that microloans have features that make them less suited to launching people into small business.
Studies suggest one of these features is the stringent repayment structure of most microloans. You have to start paying back immediately, and there’s often no option to delay even one payment. So it’s payday loans in Washington hard to engage in trial-and-error tweaking of your business plan – the kind of experimentation that could help you come up with the most profitable way to run the business. “
Simone Schaner, an economist at Dartmouth University who has studied programs aimed at increasing women’s participation in the workforce, says another explanation of microlending’s limitations is that the whole idea of relying on microenterprise to lift people out of poverty is misguided.
“Entrepreneurship is a great avenue for some people in some contexts,” she says. “But not everyone is best served by having their own small business.”
She and other researchers also stress that the scientific studies of microlending have not all been doom and gloom. For one thing, they found no evidence to bear out concerns that microloans could actually be causing widespread reduction of incomes by for instance tempting people to take on levels of debt that end up pushing them further into poverty.
And on a positive note, studies have revealed that many people turn to microloans for a range of useful purposes unrelated to starting a small business. They can be a way to pay down higher interest debt, for instance, as well as to finance major purchases such as a new refrigerator or a new roof, and perhaps, most significantly, to smooth over the financial hit when earnings from other sources dip or a family member gets sick.
In some instances – though certainly not all – this presumably means borrowers are using the loans in ways that violate the terms. Either way, the point is that microloans are serving all sorts of important needs – just not necessarily the small business need still associated with them in the popular perception. And Karlan says that while, sure, granting a poor person access to credit for these other, more modest purposes isn’t likely to pull them out of poverty, it clearly improves their life. “And that’s good under the principle that if you expand people’s choices then they have more ability to do what’s best for themselves,” he says.
With a classic microloan, says Banerjee, “You have to keep generating cash flow every week and that makes it really difficult
This doesn’t mean microloans can’t be improved upon. Many analysts argue that because poor people’s access to savings and insurance plans are limited, they’re effectively being forced to use credit to deal with situations that are better handled by these other types of financial products.
In short, concludes Schaner, if microloans haven’t proved themselves the poor’s salvation, neither should the industry be scorned as useless.
“Microfinance is a victim of an unfortunate tendency in development, which is that everybody wants to find a silver bullet to solve poverty,” she says. “And the fact is that poverty is this massive, incredibly difficult problem. There is no silver bullet.”