I first heard of microcredit in college. It was the mid-to-late 2000s, a watershed decade for the sector. In 2005 the United Nations declared it the year of microcredit. A year later, Muhammad Yunus won the Nobel Peace Prize following decades of providing capital to women at the bottom of the economic pyramid. By 2008, micro loans were fully mainstream. My parents gave out Kiva gift certificates for Christmas that year. I will never forget them explaining how we could use small loans to help less fortunate people achieve their dreams… all the while my pre-verbal sister sucked on the corner of her paper certificate.
Eventually, the narrative on microfinance flipped. Stories of predation replaced stories of promise. Reports of coercive loan recapture tactics popped up. Mexico’s largest micro finance institution gained attention for cataloging and then taking basic household wares loan collateral. Even pioneering organizations were accused of misrepresenting lending details, including providing loans to repay to loans to repay loans. By 2010, the state of Andhra Pradesh (where India’s microfinance sector blossomed and eventually busted) issued an ordinance halting all micro lending. The cause? A wave of borrower suicides linked to exploitative practices and heavy-handed recapture methods.
Many people dropped out of the micro credit fan club. “Americans have lots of debt, and I’m not sure we’re better for it. Is micro credit really a solution to poverty, or is it doing more harmful than good?” I remember discussing with my parents at a subsequent Christmas.
During my AIF Clinton Fellowship, I had an opportunity to explore for myself whether micro credit really is a good tool for addressing economic inequality. While serving with the Indian Institute of Corporate Affairs (IICA) and their National Foundation for Corporate Social Responsibility, I conducted an impact assessment of one of the India’s most popular microfinance institutions. Through this study I met hundreds of women who spoke to the impact of micro loans. I collected data to quantify impact and effectiveness at poverty alleviation. Finally, I examined loan uses, repayment rates, recapture tactics, and other areas known to be problematic. Having examined all these elements, my belief in the promise of microcredit is revived. You can read the first part of this series here.
My host organisation was hired to assess the impact of microloans made to tribal self-help group (SHG) members (for more information on SHGs, see article Self-Help Groups: An Overview). The study was conducted on behalf of a governmental agency providing subsidized, earmarked capital to the lender for the purpose of making loans to tribal women. I led a mixed methods case control study that assessed the flow of credit to tribal women and impact therein. We collected primary data from approximately 700 women borrowers across 10 villages and four districts in southern India (see article Adivasi Access: The Impact of Microfinance on Tribal SHGs in Southern India (Part 1) for additional details on the study design and data collection).
Borrowers: Beneficiaries’ pre-loan income averaged 66,890 INR ($2.50 USD) per day. Predominantly, those surveyed belonged to Scheduled Tribes and/or Scheduled Castes. Only 24 percent were literate. All lived in highly rural areas.
Loan Uses: Most of the borrowers utilized their loan for productive purposes (nearly 95 per cent). Agriculture and allied sectors represented the most common uses. After agriculture, borrowers most frequently utilized the funds for service enterprises (such as small grocery stores and tailoring). Approximately five per cent of borrowers utilized the loans for health and education. Such uses represent cushioning of catastrophic health expenditures and similar emergencies that can cause lower-income households to relapse to below the poverty level. In approximately 90 percent of cases, the loan amount and asset were reasonably matched. This indicates limited leakage to off-the-books uses.
Repayment: Borrowers from the beneficiary group averaged a repayment rate of more than 99 percent, and 96 percent of reported being able to effectively manage the loan amount.
Income: Income rose 38 percent for Scheduled Tribe borrowers and 30 percent for non-Scheduled Tribe borrowers. In conjunction with other findings this indicates that the impacts of micro credit are more strongly realized by the ST community, consistent with SHG literature that indicates benefits accrue more readily to the very poor.
Development indices: We asked the beneficiaries to identify whether they experienced improvements across 10 development indices as a result of their loans. Both the beneficiary and control group borrowers reported improvements in all 10 measured indicators following receipt of the loans. The greatest impacts reported by beneficiary borrowers included feeling more self-reliant and confident (89 per cent), education to children (86 per cent), and food quality and quantity (85 per cent).
The organisation at the center of my study exemplifies best practices and great outcomes. My host organisation was asked to assess and quantify the lender’s impact because as the program was being considered for expansion to other states. Recognizing then that this is a preeminent example, it nonetheless highlights the potential impact that micro credit can have on poverty. When well-designed and responsibly executed, programs that capitalize women at the bottom of the economic pyramid can have a dramatic impact on quality of life as measured by not just income but numerous indicators.