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Business Daily: Microfinance questions

29/07/2009

Microfinance questions

BBC World Service - Business Daily, Microfinance questions

Has there been too much hype about microcredit or banking for the poor, and does it work?

Has there been too much hype about microcredit, where poor people borrow money to start their own tiny businesses?
We go to Zambia, and examine new research which suggests it may not help.

Business Daily asks if there has been too much hype about microcredit - where poor people borrow money to start their own tiny businesses.

We talk to borrowers and lenders in Zambia, and hear the shocking results of new research which suggests it may not raise people out of poverty, and it gives fewer benefits to women than men. 

There are few real miracles in this world, but microfinance is meant to be one. It is banking for the poor, in the developing world, and part of it, called microcredit,  means lending tiny amounts of money to people so they can run small businesses.  The theory is that those businesses enable individuals to earn more money, and so strengthen the whole economy.  The grand aim, is to lift large numbers of people out of poverty. 

One of the chief founders of the movement is Nobel-Prize winner Mohammad Yunus, who created Grameen Bank in Bangladesh which lends money to many low-income workers, especially women. When Lesley Curwen spoke to him in March 2008 she asked him if it really raised people's incomes.  

Recently serious questions have begun to emerge about this sort of lending.  The recession and the credit crisis has made it harder for microfinance organisations to find funding, and harder for some borrowers to pay back what they owe. 

But there are more fundamental issues about whether people really do benefit from microcredit in the way we'd all hoped.

The BBC's Jo Fidgen in Zambia has been looking at how the microfinance industry provides capital for small and medium-sized enterprises, or SMEs. She found that the high interest rates charged can lead to a debt trap.

Every year billions of dollars are ploughed into this sort of lending, and part of that is supplied through aid money, from donor governments.  

So is that precious money well spent? It all comes down to that central claim about microcredit - that lending small amounts to individuals to run businesses - can and does lift people out of poverty.

Academics have been trying to work out from the evidence whether microcredit does actually raise people's incomes. But it's been hard to do a proper scientific survey, since you need to compare those who do get a loan with a control group of similar people who don't. 

Dean Karlan, who's a Professor of Economics at Yale University, has managed to do it, with a control group, in the Philippines. 

His results raise some serious questions about the effectiveness of microcredit in reducing poverty.

Do send us your thoughts about microcredit. You can email us through our website bbcworldservice.com

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