This study finds that, while both micro-credit and micro-savings have the potential to improve the lives of poor people, micro-credit also has potential for harm. A growing micro-credit industry could therefore be a cause for concern and, if driven by people’s need to take out further loans after a default, it might in fact be a symptom of the failure of micro-credit. Micro-savings could be a safer investment for development agencies.
Microfinance is a term used to describe financial services for those without access to traditional formal banking. It incorporates the provision of loans, often at interest rates of 25 per cent or more, to individuals, groups and small businesses. More recently it has also been extended to include the provision of savings accounts – micro-savings – as well as insurance and money transfer services.
The evidence available on sub-Saharan Africa suggests that, in relation to the incomes of poor people, micro-credit has mixed impacts and micro-savings has no impact. Both micro-credit and micro-savings increase the levels of poor people’s savings and clients’ expenditure and accumulation of assets. There is some evidence that microfinance enables poor people to be better placed to deal with shocks, but this is not universal. Further:
- Both microcredit and micro-savings have a generally positive impact on the health of poor people, and on their food security and nutrition, although the effect on the latter is not consistent.
- The evidence of the impact of micro-credit and micro-savings on education is varied, with limited evidence for positive effects and considerable evidence that micro-credit may be leading to fewer clients’ children enrolled in school. It seems that children are being taken out of school because clients have difficulties paying school expenses.
- While businesses can benefit from micro-credit, the longer clients remain within a micro-credit scheme, the less likely their business is to succeed.
- There is some evidence that micro-credit is empowering women; however, this is not consistent.
- Both micro-credit and micro-savings have a positive impact on clients’ housing.
- There is little evidence that micro-credit has any impact on job creation, and there are no studies measuring social cohesion.
Some people are made poorer, and not richer, by microfinance – particularly micro-credit clients. This seems to be because:
- They consume more instead of investing in their futures
- Their businesses fail to produce enough profit to pay high interest rates
- Their investment in other longer-term aspects of their futures is not sufficient to give a return on their investment
- The context in which microfinance clients live is fragile.
Thus, while successful increases in income, the successful repayment of loans and the accumulation of financial wealth are all feasible, they are not always achievable. If micro-credit clients fail to increase their incomes, they will default on their loans, lose their collateral, and could be forced to borrow again. This second loan might be from the same lender or, if they are unable to get further credit from that lender, from a second microfinance institution (MFI): the proliferation of MFIs might be a symptom of the failure of micro-credit and not of its success.
To avoid creating unrealistic expectations, donors need to engage with this evidence. They should not contribute to the damaging rhetoric of the success of microfinance or promote it as a means of achieving the MDGs. Rather, it is important to:
- Note that the emphasis on reaching the ‘poorest of the poor’ may be flawed: a more specific focus may be needed on providing loans to entrepreneurs, rather than treating everyone as a potential entrepreneur.
- Ensure that the potential for both harm and good are taken into account in decisions to extend microfinance services in sub-Saharan Africa.
- Introduce greater requirements for rigorous evaluation of pilot programmes before roll-out to minimise the risks of doing harm.
- Be cautious about offering clients continuing loans.
- Conduct further thorough evaluations, particularly of micro-savings schemes, and across the full range of microfinance models, including self-help groups.
- Improve consistent and detailed reporting of microfinance interventions.
- Develop and employ greater standardisation of outcomes measured and of measures used.
