Thirty-five years ago the perfect solution to poverty in developing countries appeared to have been found: Microcredit! The idea was to provide extremely poor people with small loans so they could start and operate a business, thereby supposedly helping them facilitate their escape from poverty. It had been suggested that it was their lack of access to financial resources which was a key obstacle blocking their development. It wasn’t that they didn’t have skills or motivation – so the argument went – but that they were missing capital with which to jump-start productive enterprises. So, by being provided with this necessary capital, they would at last have the chance to break out of the cycle of poverty.
According to the World Bank, in 1990 there were almost 2 billion people living in extreme poverty, and the international development community had long sought to find a solution to poverty. One can understand their excitement when the concept of microcredit materialized. Although microcredit initially started out as non-profit initiative, by 1990 this had started to transform into a financially self-sustainable industry, with microcredit institutions converting to for-profit status and radically increasing the number of loans they provided. By 2013 the microcredit industry was worth 100 billion dollars, and almost 1.1 billion people had been reported to have moved out of extreme poverty since 1990. But is this really a situation of direct cause-and-effect?
Over time the promise of microcredit has begun to come under attack from a number of directions. In the academic world, some scholars proposed microcredit as a salient instrument with which to address credit constraints, enable entrepreneurial activity and broadly foster individual development, while other scholars challenged the proposed benefits. “The literature on the outcomes of microcredit was so conflicting that we couldn’t really know if its impact is positive or negative,” explains Myrto Chliova, who is currently Assistant Professor at the Aalto University School of Business in Helsinki. Her research has focused on how entrepreneurship intersects with poverty – and the most prominent example for that is microcredit. “During my PhD at ESADE, one of my supervisors was Associate Professor Jan Brinckmann, who was an expert in meta-analysis,” says Professor Chliova. This is a method used to quantitatively synthesize an entire field of literature in order to obtain combined conclusions on the existence and/or direction of a relationship. Meta-analysis was a perfect method to try and weigh, and understand, the conflicting findings in the microcredit literature. According to Professor Chliova, the motivation for the research was to be able “to see what happens on average: is microcredit a good thing to have or not?”. The research team was complemented by Nina Rosenbusch, Associate Professor at Wilfrid Laurier University of Canada, and also a meta-analysis expert.
“We also wanted to see how different factors influence these seemingly different results. In business we tend to look a lot at the financial outcomes of programs; however, development does not consist only of financial outcomes. It’s about how much we can improve the capabilities of people and their freedom to live the lives they want. In addition to financial and enterprise outcomes, we therefore wanted to look at outcomes such as health, education and women’s empowerment,” Professor Chliova explains. After putting together and analyzing results from 90 individual studies, the team discovered that globally, on average, when entrepreneurs receive a microloan, the impact is small but positive on a number of outcomes. In terms of financial outcomes, microloans were shown to have an overall positive effect on venture growth, venture profitability as well as the financial well-being of the entrepreneur. And the non-financial effects are also positive: the meta-analysis shows that microloans have positive effects on human development outcomes such as health and nutrition, the empowerment of women and the education of entrepreneurs’ children.
Although these results clearly show that microcredit has a positive effect, authors urge readers to be careful when interpreting the data. “We didn’t find the transformative effect that many of the microcredit enthusiasts talk about,” Professor Chliova clarifies. That means that although the relationships are positive, the effects are relatively small.
One of the team’s most interesting findings is the effect on women’s empowerment. Historically, microloans have been directed towards women. This has partly been due to the fact that women are often more excluded from financial services and educational opportunities than men. Women usually spend their money in ways that improve their families’ nutrition, health and education. Access to microcredits gives them greater agency in becoming bread-winners who bring money back home, and it assigns them with responsibilities and rights, thereby ultimately empowering them.
Another angle by which this research analyzed microloans was in terms of where they would be most useful. Some scholars have argued that microcredit is a substitute for traditional financing instruments, hence suggesting that their positive impact should be greatest in less-developed countries, where institutions fail and microcredit constitutes the only option. In contrast, others have proposed complementary relationships between increasing levels of social, economic and institutional development and the effects that additional development interventions (such as microcredit) can generate. What the analysis showed is support for the first scenario: microcredit is most beneficial in developing countries with weak institutional environments, for instance in cases where access to health support or education is limited or political freedom and transparency are reduced. “One exception is the effect on women’s empowerment, where we found that in countries that exhibit more political freedom, microcredit might impact women’s empowerment even more positively,” Professor Chliova explains.
The study has been important in providing conclusions to this long-lasting discussion on whether microcredit really benefits the poor. The data says it does, but only moderately. Microcredit provides individuals with financial resources they can use to start, maintain and grow their own ventures, which can enhance their financial well-being and broaden their human development outcomes. Overall, then, microcredit can be an effective intervention to fight poverty; however, the results of this study do not support the rhetoric of microcredit proponents, who advocate the transformative effects of microcredit on poverty. Policy-makers, non-profit organizations and entrepreneurs are advised to acknowledge that microcredit is but one useful aspect of successful development efforts, which needs to be combined and balanced with other promising approaches.
Chliova, M., Brinckmann, J., & Rosenbusch, N. 2015. Is microcredit a blessing for the poor? A meta-analysis examining development outcomes and contextual considerations.Journal of Business Venturing, 30(3), 467-487.