Study of microcredit finds generally positive, but not transformative, impacts

Microcredit generally benefits borrowers, according to new research focused on Mexico’s biggest for-profit microlender — but it’s not lifting people out of poverty.

In a multi-year, randomized evaluation of microloans provided by Compartamos Banco, Yale University economist Dean Karlan, with collaborators Manuela Angelucci of the University of Michigan and Jonathan Zinman of Dartmouth College, show there are generally positive effects on average and find little evidence that some borrowers end up worse off while others end up better off. However, the canonical story that microcredit leads to higher enterprise income did not bear fruit.

“Microcredit done by a for-profit lender is having a mildly positive impact, but nothing resembling poverty alleviation,” said Karlan, professor of economics at Yale and a principal author of the study, titled “Win Some, Lose Some? Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco.” The working paper was released May 14.

Microlenders provide small loans to poor people, typically in the developing world. In recent decades the practice has been hailed as an important way to improve material prospects and wellbeing for millions of people worldwide. Pioneering microlender Muhammad Yunus and the bank he founded, Grameen Bank, won the Nobel Peace Prize in 2006.

But the researchers argue that small-scale individual donors can do greater good by supporting other anti-poverty initiatives, such as remedial education programs, efforts to eradicate intestinal worms and distribute bed nets, and grant programs that help the ultra-poor create a sustainable income.

“Regarding standard microcredit, let investors do it,” said Karlan.

Compartamos Banco began as a non-profit organization, then became a for-profit, publicly traded corporation in 2007. With about 2.3 million borrowers, it had a November 2012 market capitalization of US$2.2 billion.

The new study — conducted over more than two years in north central Mexico — found that Compartamos’ main group microloan program, Crédito Mujer, had positive but not transformative effects on borrowers. The program focuses on women who want to start businesses and makes loans to groups of women whose members guarantee each other’s loans.

“On average, businesses do not become more profitable and income does not increase, but people are better able to manage debt without selling assets, women gain more power in the household, and happiness increases,” the researchers write in a study summary.

The initial loan amounts provided to borrowers ranged from US$125 to US$500.

Borrowers without formal credit experience and those with especially low income did have more significant negative outcomes than other groups of borrowers, and more significant negative outcomes than positive ones, according to the study’s results.

Karlan and researchers conducted the study with Innovations for Poverty Action, a non-profit he founded in 2002 that works around the world to produce knowledge on what works, what does not, and why, in the fight against poverty, and then to scale-up the policies with the strongest evidence. The study focused on 238 neighborhood-sized communities in Mexico’s Sonora State. Compartamos Banco, working with the researchers, marketed its Crédito Mujer loans in half the communities and not in the others, allowing for meaningful comparisons.

Researchers analyzed the effect of credit on dozens of objective and subjective outcomes, including business ownership, number of employees, recent profits, trust in people, satisfaction in life, and health.

Compartamos Banco, the Bill and Melinda Gates Foundation, and the National Science Foundation provided support for the project.