What Microcredit is…and what it isn’t

There’s something thrilling about the way A. V. Banerjee goes about whacking away at the thick underbrush of hype and BS that has grown around the Microcredit movement. There’s a twilight of the idols feel to it, and I just love it.

Take this lecture he gave in Perú last year. Yes, the video quality is awful, and you can’t see the slides, etc. etc. None of that matters – the guy is too brilliant. If you really want to cut to the chase, you can start from 36:34 – but trust me, you can do way worse with an hour than to listen to the whole thing. Just treat it like radio:

Isn’t that thrilling?

As the high priest of the Church of RCTology, Banerjee speaks with the kind of authority about this topic that lesser mortals can only dream of. Between him and RCT Co-Priestess Esther Duflo, the market for Aid Nerd Chic is effectively cornered.

The takeaway here is emphatically not that Microcredit is useless. Far from it. The takeaway is that microcredit has been systematically mis-sold. Tiny loans do a lot to improve the lives of the very poor. One thing microloans don’t do, though, is make them less poor.

Banerjee’s take on microcredit brings to mind a lovely quote from a paper by Jain and Moore: “to properly appreciate the great achievements of the microcredit movement, one has to be more skeptical of its self-image than is normally considered polite or respectful.” [Hat tip to Roodman for that.]

In Banerjee’s analysis, the problem is that the familiar narrative about the bottom billion as entrepreneurial but capital-starved just isn’t borne out by the evidence. Framing the poor as “natural entrepreneurs” obscures the much more mundane reality that, for the most part, very poor people in very poor countries use very small loans very much in the same way middle class people in rich countries use bank loans: to finance big ticket items that massively improve their lives but cost multiples of their monthly income.

If you earn the median U.S. worker’s income, you can’t shell out $20,000 in cash for a nice car next month. That’s six months’ income! It might take you 5 or 6 years to save up that much cash. But that doesn’t mean you have to walk to work every day for the next six years while you save up to buy a car. You get a loan and pay for it while you’re driving it it. Does that loan increase your income and transform your life chances? No. Does it massively improve your quality of life? You betcha.

If you’re in the bottom billion, you can’t shell out $200 in cash to finally fix the damn roof that’s been leaking on you for the last two years. That’s like six months’ income! It might take you 5 or 6 years to save up that much cash. But that doesn’t mean that you have to keep getting rained on for six years while you save up for your roof. You get a loan and pay for it while you’re using it. Does that loan increase your income and transform your life chances? No. Does it massively improve your quality of life? You betcha.

I think this is heartening. It demystifies the very poor, lays bare the way their hopes and aspirations in many way work in the same ways ours do.

But it also underlines the central “uncomfortable facts” that the development world seems blind to: “improving the lives of the poor” and “fighting poverty” are two very different things.

Not all interventions that make the lives of the poor better do so by making them less poor.

The microcredit movement may be the paradigmatic example of an intervention that “succeeds” by making life in poverty more bearable.

That doesn’t mean microcredit is not worth doing. But it does mean that if you got into this business to fight poverty, you have to come to grips with the fact that this bus doesn’t stop at that station.

5 thoughts on “What Microcredit is…and what it isn’t”

  1. Muhammad Yunus (Grameen Bank) never intended microcredit loans as capital for budding entrepreners. A woman earning just enough to send her kids to school would be sufficient.

    1. Right…but Banerjee’s whole point is that there’s no evidence that women earn more after microcredit than before. If your main concern is increasing income (to allow women to invest in kids’ education, or for any other reason), Microcredit is the wrong tool.

  2. I think there are a lot of misunderstandings about what people use microloans for. My understanding is that the few rigorous evaluations of microcredit programs have shown that people use microcredit more for income smoothing than for investment into productive enterprises. There aren’t that many investment opportunities around for most micro-borrowers, but everyone can use a something to tide them through periods when they’re not earning income from other sources.

    1. The neat thing about Banerjee’s research is that he shows it’s largely not “consumption smoothing” in the sense of using food to buy food, or clothes or things like that. It’s mostly consumer durables people seem to buy. TV sets. Home repairs. Bikes/motorbikes. Cows – but more to drink the milk than to sell it. That kind of thing.

      Definitely play that lecture when you have a chance – it’s great fun.

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