That was the global trend around tiny loans that was supposed to transform the developing world. One and two-person firms would get loans of less than a hundred dollars, and that loan would enable them to ramp up their business. The world’s biggest banks jumped on board the idea, and it looked like the future had no limit.
Over a hundred million have taken out loans and billions have been lent, and a Nobel Prize has been awarded. But are poor people better off? The evidence is mixed.
Dartmouth, MIT, and UCLA all sponsored studies of microfinance projects in India, the Philippines, and Kenya. What they found is interesting. Often the borrowers used the money to buy household goods, not invest in their businesses. And business investment often came in the form of buy-outs of marginal employees, rather than productivity-enhancing equipment.
The result was that businesses sometimes shrank, and households often consumed less in the long run to pay back the loan. In the meantime, the local loan shark lost out. The picture painted isn’t so much entrepreneurs lifting themselves up by microcredit bootstraps, as people doing what they need to get by.
While this isn’t terribly romantic it’s still positive. Someone said that we will always have the poor with us. Microfinance may not be a revolution, but it gives many of the poorest more control over their lives.
Douglas R. Tengdin, CFA
Chief Investment Officer
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