Microlending Shrinks Businesses, Makes Borrowers Unhappy

The science fiction website io9 reports on a new study of microlending that finds that microloans work very differently than advertised.

Instead of growing businesses, microlending seems to shrink them. At the same time, however, it makes them better at risk management.

Here (via Professor Bainbridge) is io9’s summary of the report:

Microfinance expert Dean Karlan has just published a study of the effects of microcredit, and while there are some advantages, they're definitely not what we originally thought. ... Karlan and his colleague Jonathan Zinman undertook a large study of 1,600 individuals in the Philippines, randomly giving half of them small loans and tracking the progress of all of them over the next 11-22 months.

Rather than seeing the businesses grow, most of them stayed the same size or even shrunk. The microloans didn't generate higher income, and the recipients wound up feeling less confident.

The benefit the researchers did find was that the people they funded had stronger risk management, and their families were better able to weather fluctuations in personal finance and unexpected expenses. They were then able to better rely on informal lending from other sources, and the ties between the individuals and their communities were strengthened.

While this is only one study in one country, it does paint a picture remarkably different from the one that the creators of these programs want us to see, where microfinance leads to small businesses growing stronger and more wealthy. Instead we see businesses stay the same size or even shrink, but cement their places in the community.

It would be interesting for someone to study further how this operates. Why don't the loans foster growth? Why are the borrowers more robust when faced with risk? Why are they subjectively less happy?

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