Define microloans and determine how microloans can be utilized effectively ?, assignment help

Lodewijk Berlage ([email protected]) was a professor at KU Leuven, Belgium;

Namrata Vasudeo Jasrotia ([email protected]) is a professor at XIDAS, Jabalpur, India.

http://dx.doi.org/10.3362/1755-1986.2015.007, ISSN: 1755-1978 (print) 1755-1986 (online)

Microcredit: from hope to scepticism to

modest hope

LODEWIJK BERLAGE and NAMRATA VASUDEO

JASROTIA

After its introduction in the late 1980s and its fast expansion thereafter modern microfi-

nance, and specifically microcredit, raised the hope that it could combine access to (semi-)

formal credit for the poor with financial sustainability of the new microfinance institu-

tions, and that it would contribute to increased micro-entrepreneurial activity, consumer

welfare, and the empowerment of women. More recently scepticism about the operation of

microfinance institutions and their impact has arisen. Based on the literature, we discuss

the possibility of combining outreach to the poor with financial sustainability, microfinance

crises, and the findings of recent impact studies. Our conclusion is that microfinance is not

a panacea for development, but that it is a tool poor households can use in their fight for

survival.

Keywords: microcredit, outreach, financial sustainability, microcredit crisis, impact

odern microfinance , and more specifically microcredit, was one of the most

remarkable innovations in development practice of the end of the 20th century.

Before 1980 in most low-income countries, banks and other formal financial insti-

tutions were hardly present in rural areas and they were not interested in providing

small loans to poor people or accepting their small savings. Small loans and savings

are administratively cumbersome and thus costly; moreover the recovery of small

loans was deemed problematic due to the lack of collateral. In many countries public

authorities had tried to remedy the problem by providing subsidized credit targeted

at poor households. But a fairly common view was that this policy had failed as

locally powerful persons had appropriated the subsidized credit and quite frequently

were refusing to repay their loans without being sanctioned. Frequently repayment

rates were as low as 40 per cent or even less (see references in Armendáriz de Aghion

and Morduch, 2005). In the absence of access to credit from formal financial institu-

tions and of personal savings, poor people who needed credit to cope with negative

income shocks or to run small businesses had to request loans from relatives and

friends or from local moneylenders. Loans from relatives and friends are commonly

small; those from local moneylenders are costly with monthly interest rates of up to

10 per cent or even more. Modern microcredit had its origins in the 1980s when in different parts of the

world new initiatives were taken to provide small loans to people without access

Enterprise Development and Micronance Vol. 26 No. 1 March 2015 64 L. BERLAGE And n . VASUdEO JASROTIA

to formal credit institutions. The best known of these was the Grameen Bank in

Bangladesh which after some preceding experimentation by its founder, Muhammad

Yunus, was formally set up as a bank in 1983 by a government ordinance. Elsewhere

in the world other microfinance initiatives were developed. In India the Mysore

Resettlement and Development Agency (MYRADA) started in 1987 with the

promotion of Credit Management Groups, precursors of the Self Help Groups, a

typically Indian vehicle for microcredit (Harper, 2002).

Since those first initiatives, microfinance institutions (MFIs) have proliferated all

over the world. Many microcredit initiatives were set up by NGOs as part of their

development activities. In time a number of these NGOs created separate entities

for their financial operations in the form of banks or, more commonly, non-bank

financial institutions. A number of these new institutions expanded their lending

quite rapidly. Frequently the change in legal status combined with the rise in

lending was linked with a gradual shift in objectives, from the pursuit of social goals

to that of profit. Some observers deplored this shift (see e.g. for India, Fisher and

Sriram, 2002). Meanwhile microfinance became a hype. The first Microfinance Summit in 1997

set an objective of reaching 100 million households by 2005. At the 2006 Summit

this objective was raised to reaching 175 million households and getting 100 million

households out of poverty by 2015 (see www.microcreditsummit.org). How can the

microcredit hype be explained? The core explanation was the hope for a win–win

situation. On the one hand modern microcredit aimed at providing financial access

(‘inclusion’) for poor people who previously had been excluded from formal credit.

In this way poor borrowers would be able to start up or expand microfirms and this

would contribute to an increase in their households’ income and consumption. On

the other hand microcredit would be provided by financially sustainable institu-

tions; that is, institutions that would be able to cover at least their operational costs,

but ultimately their full costs. Financial sustainability of the microcredit providers

required the introduction of innovations including, among others, joint liability

groups, strict repayment schedules, MFI agents visiting the debtors in their villages,

and the promise of new and eventually higher loans if debts were served. In addition it was hoped that microfinance would contribute to economic growth

and poverty alleviation. For donors of development assistance these were very

attractive propositions as microfinance offered a channel to promote development

combined with the creation of sustainable financial institutions that would make

assistance superfluous. But gradually doubts have arisen on whether microfinance was the panacea for

development it had been heralded to be. Some doubts were raised early on, for

example by Hulme and Mosley (1996) and Morduch (1999). Symptomatic of more

recent criticism are book titles such as What’s Wrong with Microfinance? (edited by

Dichter and Harper, 2007) and Why Doesn’t Microfinance Work? The Destructive Rise

of Local Neoliberalism (Bateman, 2010). Scepticism has gone in different directions. We discuss three of them here. First

there were doubts on whether outreach to the poor could really be combined with

financial sustainability of MFIs. The suspicion was that financial sustainability was

March 2015 Enterprise Development and Microfinance Vol. 26 No. 1 MICROCREdIT: HOPE And SCEPTICISM 65

possible only if subsidies were provided on a continuous basis or if not-so-poor

borrowers were accepted as clients. In this view, instead of a win–win situation there

was a trade-off between outreach to the poor and financial sustainability. A second

line of doubt is linked to the occurrence of microcredit crises. Most prominent was the

2010 crisis in Andhra Pradesh, the heartland of Indian microfinance, which resulted

from borrowers’ complaints about the coercive loan recovery practices of MFI agents

and group peers, of over-indebtedness of many borrowers, and of the allegedly high

cost of microcredit. A third line of doubt concerns the impact of microcredit. Recent

impact studies have raised doubts on the effects of microcredit on the welfare of the

borrowers, on microenterprise activity, and on the empowerment of women, and

hence on the capacity of microcredit to lift poor borrowers out o f poverty.

In the following three sections we discuss each of these three topics. Our discussion

is based on a selective review of the literature; we do not pretend to be exhaustive

(which would be impossible in the framework of a short paper). Rather we select

studies in order to provide a broad picture of the results achieved and the problems

met by modern microfinance. Our discussion leads to the conclusion, formulated in

the final section, that microfinance is not the hoped-for panacea for development

and that its growth may present dangers both for its clients and for the sector as a

whole, but that nevertheless it can be a useful tool the world’s poor can use in their

fight for survival.

Outreach and financial sustainability

The major attraction of modern microfinance was the prospect that poor people

would be offered access to loans (and savings products) provided by formal or

semi-formal financially sustainable institutions. Financial sustainability can be

defined in terms of current operations: a financial institution is operationally

sustainable if its revenues are sufficient to cover its operating costs plus the costs

of default. An institution that is not operationally sustainable will need a never-

ending stream of grants or soft loans in order to survive. Full financial sustainability

covers operational sustainability plus independence from grants or subsidized credit

as sources of funds. Financial sustainability is not strictly necessary for an MFI’s

survival provided it has access to governments’ and aid donors’ grants or soft loans.

But as governments and donors can at any time stop their assistance, financial

sustainability is a reasonable objective. The initial providers of microcredit focused on the provision of loans to formerly

non-bankable poor households. As microcredit expanded, increasingly MFIs were

set up as for-profit institutions independent from the initial providers, quite often

NGOs. Such MFIs stressed profits based on financial sustainability even if this

made it necessary to accept not-so-poor borrowers as customers. The rise of rapidly

growing for-profit MFIs in many countries suggests that this approach was increas-

ingly dominating the microcredit movement. Are outreach to the poor and financial sustainability compatible? Or conversely,

is there a trade-off between outreach and financial sustainability? The microcredit

movement started from the premise that the answer to the latter question was

Enterprise development and Micronance Vol. 26 no. 1 March 2015 66 L. BERLAGE And n . VASUdEO JASROTIA

negative, without empirical underpinning. Empirical studies on the existence of

a trade-off are based on data sets of MFIs in a number of different countries. Early

studies used data on a limited number of MFIs whereas more recent studies use large

data sets. Examples of the former were Mosley and Hulme (1998) and Morduch

(1999). On the basis of data for 13 MFIs Mosley and Hulme concluded that more

financially sustainable institutions had a stronger impact on recipients’ income

than less financially sustainable ones. Morduch (1999) found that most of the 72

microfinance programmes in his database had crossed the operational sustainability

threshold, but ‘many fewer’ were financially sustainable. The better performers on

financial sustainability in his sample were broad-based programmes that served a

wide range of clients. The few programmes that focused on ‘high-end’ clients did

not perform better than the other programmes. Morduch also remarked that his

study was based on rather big MFIs and that the many MFIs not in his data set were

probably performing worse in terms of financial sustainability.

Empirical studies went into a higher gear in 2007 with a paper by Cull et al.

(2007). This paper systematically analysed data for 124 MFIs in 49 countries. A

basic finding was that the relation between average loan size (standing for outreach

to the poor) and profitability was not statistically significant; that is, institutions

concentrating on poorer clients were not necessarily less profitable. But the authors

qualified this finding by other observations: for example, larger and older MFIs did

worse on outreach than smaller and younger ones, which suggests ‘mission drift’. Later studies are based on databases of hundreds of MFIs, most but not all sourced

from the Microsoft Information Exchange (known as MIX Market). They come to

a range of conclusions, going from a negative link between outreach and profit-

ability (e.g. Hermes et al., 2011) to absence of a link (e.g. Mersland and Strøm, 2010;

Quayes, 2011), and even the existence of a positive relation (e.g. Gutiérrez-Nieto et

al., 2009; Louis et al., 2013). Moreover we should keep in mind that the studies we mentioned are based

on relatively big MFIs. Apart from them there are many more small MFIs. Casual

observation suggests that many of these smaller MFIs are hardly capable of covering

their operational costs and have to struggle for survival. The evidence found in the literature suggests that lasting dependency of MFIs on

subsidized credit is not strictly necessary in order to reach poor borrowers. But many

MFIs remain dependent on financial assistance. Financial sustainability of MFIs does

not come automatically. MFIs pursuing both outreach and financial sustainability

need to establish an institutional and operational framework that contributes to a

positive balance of revenues and costs.

Micro-credit crises: a case study of Andhra Pradesh, India

In a number of countries microcredit institutions have been confronted with

crisis situations. Usually these followed years of rapid growth of the sector, with

steep increases in the number of clients and loans. Unwanted by-products of such

expansions were the rising indebtedness of MFIs’ clients linked with multiple loans,

a public outcry over alleged misdemeanours of MFI agents, and complaints about the

March 2015 Enterprise Development and Microfinance Vol. 26 No. 1 MICROCREdIT: HOPE And SCEPTICISM 67

allegedly high cost of loans. Microcredit crises were observed in Morocco (starting in

2007), Andhra Pradesh, India (first in Krishna district in 2006, and then on a larger

scale in 2010), and in Nicaragua (the movement for non-payment, no pago, starting

in 2011). In Bangladesh in 2007–08 a crisis was averted by the concentrated action

of the big MFIs (see Chen and Rutherford, 2013). In this section we concentrate on

the crisis in Andhra Pradesh (AP), the heartland of Indian microfinance. We first

describe the events leading to the crisis and the measures taken by the state and

the union authorities. Subsequently we discuss some of the issues raised during the

crisis.

The 2010 microcredit crisis in Andhra Pradesh

In India during the second half of the 1980s a number of NGOs started promoting

the creation of Self Help Groups (SHGs), consisting of 10 to 15 members, with the

objective of stimulating the economic activities of the members, among others, by

mutual savings and credit operations. SHGs could raise their lending by obtaining

loans from formal financial institutions. A crucial step was the introduction in 1992

by the National Bank for Agriculture and Rural Development (NABARD) of the Self

Help Group Bank Linkage Programme by which NABARD would refinance bank

loans to SHGs. This programme expanded quickly and was highly successful in

raising outreach to otherwise unreached people. Separately from the SHG movement a number of MFIs were set up, usually by

consolidating the microfinance operations of NGOs in separate institutions such

as non-banking financial companies (NBFCs) which increasingly acted as for-profit

organizations. Many of these MFIs were using the joint-liability group model for

their lending. During the first decade of the present century a number of for-profit

MFIs expanded their operations very quickly, mainly financed by bank loans. The

frontrunner of this expansion was the South Indian state of Andhra Pradesh. In this

state the rapid growth was interrupted by a local crisis in Krishna District in 2006

when the District Collector shut a number of leading MFIs’ offices in the district

and instructed MFI borrowers not to repay their loans. This crisis was resolved with

support from the central bank, the Reserve Bank of India, and the growth of the

sector resumed with increased vigour. A symptom of this evolution was that in the

summer of 2010 a major MFI, SKS, went public. The initial public offering took place

at the end of July 2010 and was hailed as a massive financial success. As early as June 2010, there had been warnings of actual default rates on microloans

being far higher than reported, as defaults were hidden by MFIs replacing older,

non-performing loans with new ones. Arunachalam (2011) notes that, starting in

August 2010, rising default rates and grievances about coercive recovery practices

were already tangible at field level. In late September and October 2010 accounts

of MFI borrowers in Andhra Pradesh committing suicide accumulated. In October

2010, the Chennai-based Centre for Micro Finance noted with alarm that in Andhra

Pradesh ‘the overall rate of indebtedness is extremely high’ (Johnson and Meka,

2010: 19). It reported that 84 per cent of households had two or more loans, while

58 per cent had four or more loans.

Enterprise development and Micronance Vol. 26 no. 1 March 2015 68 L. BERLAGE And n . VASUdEO JASROTIA

After reports in local newspapers of rapidly increasing violence (Nayar et al.,

2010), the Andhra Pradesh Government on 15 October passed an ordinance to

protect borrowers. As the reason for this ordinance it cited ‘usurious interest rates

and coercive means of recovery resulting in impoverishment and in some cases

leading to suicides’ (Government of Andhra Pradesh, 2010). The ordinance required

MFIs to state their interest rates clearly and register all recovery personnel in each

district they operated in. It forbade the charging of interest in excess of the principal

(a meaninglessly high limit) and the issuing of multiple loans to the same borrower.

Furthermore it specified that MFIs should ‘not deploy any agents for recovery nor

shall use any other coercive action’ (Government of Andhra Pradesh, 2010) and

threatened to imprison the managers in cases of breach. The MFIs reacted by cutting interest rates, challenging the connection between

microloans and suicides, blaming a few rogue MFIs for abuses, and denouncing the

AP Government’s ordinance as a politically self-serving act to protect its own SHG

programme (Intellecap, 2010). But the crisis was a catastrophe for the microfinance

sector because of the damage to its reputation and the implicit signal it sent out

that borrowers would not be forced to repay their loans at any cost. Microfinance in

India went into protracted decline. In Andhra Pradesh almost all loans were written

off. Elsewhere in India the growth of MFIs came to an abrupt stop; only in 2012 did

MFIs start again to expand their operations. In the meantime the Reserve Bank of India, India’s central bank, has issued

guidelines for NBFC-MFIs and has set up a licence system. The guidelines include

capital requirements and capping of annual interest rates at 10 to 12 per cent above

the MFI’s borrowing cost. A pending microfinance bill aims to ensure development

and orderly growth of the sector.

Issues raised by the 2010 microcredit crisis in Andhra Pradesh

The Andhra Pradesh microcredit crisis of 2010 and the events surrounding it raised

a number of wider issues. We briefly discuss three of them: excessive borrowing,

coercive loan recovery practices, and allegedly high interest rates. First excessive

borrowing became a problem in an environment where several MFIs were operating

in the same area and where individual MFIs were frantically trying to expand

their lending in order to raise their profits. This resulted in loans being pushed

on borrowers who did not really need them, putting an excessive burden on poor

debtors and delivering some of them back into the arms of local moneylenders. A second problem was the coercive loan recovery practices on the part of joint

liability group peers and of MFI agents. Joint liability can be interpreted as an

expression of solidarity between group members. But it can also lead to excessive peer

pressure on debtors who are not capable of servicing their debts. MFI agents may easily

be tempted to apply excessive pressure on debtors who are threatening to default as

loan recovery is an important element in the evaluation of their performance. The

line between justified and non-justified coercion is thin and not easy to draw. A third issue was the allegedly excessive interest rates charged by MFIs. In

many creditor–debtor relations borrowers complain about high interest rates and

March 2015 Enterprise Development and Microfinance Vol. 26 No. 1 MICROCREdIT: HOPE And SCEPTICISM 69

politicians can gain popularity by subscribing to these complaints. Frequently

interest rates charged by MFIs are compared with those applied by banks and

invariably the former are higher than the latter. But MFIs aiming at financial sustain-

ability have to charge interest rates that cover their costs, including the cost of their

funds, and produce a modest profit. In this perspective interest rates between 20

and 30 per cent found in Andhra Pradesh do not seem to be excessive. In two CGAP

papers Rosenberg et al. (2009, 2013) analysed microcredit interest rates applied by

MFIs reporting to the Microfinance Information Exchange (MIX). For South Asia in

2006 they found an average cost of lending, exclusive of profits, of almost 24 per

cent. Moreover interest charges in South Asia were considerably lower than in other

parts of the world. Thus interest rates in the upper 20 per cent range as observed in

AP were probably not excessive. Elsewhere in the world some MFIs, including well

known ones, charge interest rates in excess of 50 per cent, sometimes hidden by

quoting so-called flat rates. It seems quite unlikely that such interest rates can be

justified by costs, unless the MFIs in question are very inefficient.

Impact of microcredit

Microcredit was originally targeted at promoting entrepreneurship, improving

household welfare and reducing poverty, and empowering women. Approximately

30 years have passed since the first modern microcredit initiatives were started.

Meanwhile many new schemes have been initiated. It is therefore natural to analyse

whether modern microcredit has fulfilled the promises it had made. The only way

to find this out is to make careful empirical impact studies. And indeed thousands

of impact studies of microcredit have been made.

The problem with almost all of the impact studies is that they can be criticized

on methodological grounds (see Duvendack et al., 2011, for a thorough analysis of

the methodologies used in evaluation studies). Specific problems are selection and

placement bias. The former refers to the fact that recipients of microcredit may have

unobservable characteristics that explain their performance compared with that of

non-recipients. Placement bias is present if MFIs start up microcredit programmes

in locations where they expect a good performance by recipients; as a result these

locations outperform locations without a microcredit programme. One way to

correct for these biases is to set up real-world experiments in which recipients of

microloans are selected randomly out of a database of candidates for microloans

or locations for new microcredit programmes. After the programme has been

implemented for some time the ‘treatment group’ is compared with a control group

of non-recipients or locations without a microcredit programme. Such experiments

are called randomized controlled trials (RCTs). The RCT methodology is not perfect. One critique is that findings based on

RCT experiments may be valid within, but not necessarily outside, their own

environment. Another problem is that, when applied to microcredit, the impact

is estimated after a relatively short period of time, usually 1.5 to 2 years after the

start of the programme, as the cooperating MFI is not usually willing to wait a

long time before starting microcredit for the control group. Nevertheless from a

Enterprise development and Micronance Vol. 26 no. 1 March 2015 70 L. BERLAGE And n . VASUdEO JASROTIA

methodological point of view RCTs are attractive to meet selection and placement

bias. Therefore we concentrate on the findings of the few available evaluation

studies using this methodology.

We consider the findings of four impact studies using randomized placement

(Attanasio et al. (2011) on a credit programme in rural Mongolia; Banerjee et al.

(2013) on a credit programme in slums of Hyderabad, India; Crépon et al. (2011) on

a credit programme in rural Morocco; and Angelucci et al. (2013) on a programme

in North Central Mexico) and two studies based on the random assignment of

microloans, implemented in Bosnia and Herzegovina (Augsburg et al., 2012) and in

the Philippines (Karlan and Zinman, 2011). (All these RCT-based evaluation studies

are surveyed by Banerjee, 2013.) We also include findings of a study of the impact

of a quasi-experiment, the Million Baht Village Fund programme in rural Thailand

(Kaboski and Towsend, 2012). The programme allocated 1 m baht (approximately

US$30,000) to individual villages independently of their population. Therefore

it can be considered as a quasi-experiment. This impact study is also interesting

because households were observed over a period of 11 years, six of them after the

programme had been started. We discuss the impact of microcredit programmes on access to credit, entrepre-

neurial activity, household welfare, and empowerment of women. We start out with

a fairly general finding: microfinance programmes improve access to credit for their

beneficiaries, both from microcredit and from other providers. So microfinance loans

do not just displace other loans, they add to the total credit flow. For poor households

improved access to credit by itself is important. This was emphasized by Collins et al.

(2009) in their book Portfolios of the Poor. The authors found that for poor households

money management is a part of everyday life as they must make arrangements for

matching day-to-day consumption with an irregular income flow. In addition they

must cope with risks against which they are hardly insured and from time to time

they must find the means to cover lumpy expenditure, for example, for a marriage,

for a festival, or for the purchase of costly consumer durables. To meet these three

challenges they need savings as well as loans. Microfinance may be an important

additional source of borrowing provided it is sufficiently flexible. This was confirmed

by a case study of Grameen II, the Grameen Bank after the 2001 restructuring: the

new borrowing opportunities and savings products proved to be highly successful. The evidence on the impact of microfinance on other variables is far less clear.

We begin with entrepreneurial activity. Most studies found no significant impact on

business creation. But the Bosnia and the Mongolia (with group lending, not with

individual loans) studies did find a significant positive impact and the Hyderabad

study found a minor impact. As to the expansion of existing businesses the studies

on Bosnia, Morocco, and Mexico found an increase of scale as measured by business

revenues and expenditures. But the study in the Philippines found, if anything, a

negative impact on business activity. In the Hyderabad study investment in durable

assets was found to have increased significantly. Most studies found no positive

impact on profits. The Mongolia study did find a positive impact on profits, but

again only with group lending. The Thailand study found some indications that

business profits increased in response to the microcredit programme.

March 2015 Enterprise Development and Microfinance Vol. 26 No. 1 MICROCREdIT: HOPE And SCEPTICISM 71

We now turn to household welfare. The most obvious indicator is total

consumption expenditure. All six RCT impact studies failed to find an increase in

total consumption expenditure as a result of microcredit. The Thailand study did

find a substantial and statistically significant increase in consumption levels, of the

same order of magnitude as the credit injection or even larger. But this increase was

limited in time, lasting only four years. However the composition of consumption

expenditure was found to have changed. The Hyderabad, Mongolia, and Thailand

studies found an increase in expenditure on consumer durables, including home

improvements. For non-durable consumption no impact was observed, but

expenditure on so-called temptation goods (alcohol, tobacco, meals outside of the

household, etc.) did fall. This may have been due to the fact that households gave

priority to lumpy expenditures on consumer durables. Household welfare can also be measured by subjective indicators. This was done in

the Mexico and the Philippines studies. The former found generally positive changes,

but the latter found a small overall decrease in subjective well-being. Findings on

the impact of microcredit on education and health were diverse; both for education

and for health two studies found some positive impact. The Bosnia study found that

school attendance of teenagers in marginal households with a low education level

decreased as they had to work substantially more hours in the household business. Finally four studies did not find an impact on women’s empowerment as measured

by the participation of women in household decision-making. The only exception

was the Mexico study which found that participation of women in financial decisions

slightly increased, but this was from a very high 97.5 per cent initial participation. The findings as reported here concern average effects of microcredit. For some

subgroups the effects of microcredit were more favourable, for other groups less

so. The Hyderabad and Mexico studies, for instance, found an increase in business

profits of microcredit beneficiaries in the upper tail of the distribution – the best-off

households. The Mexico study found limited evidence that microcredit may have

negative effects on some subgroups, mainly the poorer ones and those without

previous experience of formal credit. A comparison with findings from survey data is interesting. Probably the most

elaborate impact studies not based on RCT methodology, but on survey data are a

succession of papers by Pitt and Khandker (1998), Khandker (2005), and Khandker

and Samad (2014) on Bangladesh, based, respectively, on one, two, and three surveys

covering the same households, except for drop-outs and additional households

included in the two follow-up surveys. The most recent paper was based on data

for 2,322 households including approximately 800 split-offs of 1,509 households

which were included in the three surveys. Khandker and Samad (2014) find that

microloans for female household members have a statistically significant impact

on household income, but not on household expenditure whereas the opposite

is true for microloans for males. But this finding is not robust with respect to the

estimation methodology. The authors do find a robust positive impact on non-land

financial assets of microloans both to male and female household members. Thus

if robustness is taken into account Khandker and Samad’s findings are not quite

different from those of the RCT impact studies we discussed in this section.

Enterprise development and Micronance Vol. 26 no. 1 March 2015 72 L. BERLAGE And n . VASUdEO JASROTIA

The above findings are sobering. Microcredit has a positive impact on access to

credit and this is useful for the poor. But the RCT studies suggest that its impact

on entrepreneurship, household welfare, and women’s empowerment is limited or

non-existent. Of course we should keep in mind that the impact of any programme

is dependent on local factors and that most of the findings of RCT impact studies

are based on surveys implemented a relatively short time after the start of the

programmes. Nevertheless it seems safe to conclude that the hopes originally raised

by microfinance were exaggerated. We may refer to a remark made by Hulme and

Mosley in their 1996 synthesis of case studies of MFIs that ‘such schemes are not

the panacea for poverty reduction that has been claimed’ (Hulme and Mosley, 1996,

Vol. 1: 114).

Conclusion

Modern microfinance has been with us for approximately 30 years. In its early days

it did raise high hopes: outreach to the poor combined with financially sustainable

institutions resulting in promotion of microenterprise, improvement of household

welfare, and empowerment of women. Has microfinance, and more specifically

microcredit, fulfilled its promises? In order to provide an answer to this question in this paper we considered

three issues. First, recent empirical research suggests that it is not impossible to

combine outreach to the poor with MFIs’ financial sustainability. Some research

even suggests that profitability is associated with deeper outreach. But many MFIs

remain dependent on grants or subsidized credit. Second, like the financial sector

at large, the microcredit sector is not immune to crises and their accompanying

excesses. Third, RCT-based impact studies show that microcredit institutions do

improve financial access for their clients. But their impact on entrepreneurial

activity and on household welfare is less clear. Microcredit is certainly not a panacea

for development. Our findings have implications for the future of microcredit. We list three of them.

First, rather than constantly repeating the mantra of microenterprise promotion,

the microcredit sector should recognize the importance of consumption credit for

poor households. Many microloans are directly or indirectly used for consumption

purposes. Moreover consumption loans are an important component of household

finance, for poor as well as for richer households. Second, measures should be

taken to prevent overindebtedness, coercive loan recovery practices, excessively

high interest rates, and credit bubbles. Self-regulation by MFIs, for example in the

form of codes of conduct, may go some way to assure an orderly development of

the sector. But ultimately some form of regulation by the financial authorities is

needed to supervise MFIs and to prevent credit bubbles and subsequent crises. In

addition a flexible regulation of interest rates and other costs charged by MFIs may

facilitate the acceptance of the relatively high costs MFIs have to charge to assure

their financial sustainability. Third, MFIs should continue to innovate in order to

reduce their costs and to offer credit and savings products adapted to their clients’

March 2015 Enterprise Development and Microfinance Vol. 26 No. 1 MICROCREdIT: HOPE And SCEPTICISM 73

needs. It is important that regulation of the microcredit sector preserves the scope

of MFIs to do so.

References

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Attanasio, O., Augsburg, B., De Haas, R. Fitzsimmons, E. and Harmgart, H. (2011) Group Lending

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