Micro-credit not transforming lives of poor: Study

A study conducted in six countries including India has revealed that while micro-credit - providing small loans to under served entrepreneurs - has some benefits, it is not a viable poverty alleviation tool.

The studies, conducted independently in India, Bosnia and Herzegovina, Ethiopia, Mexico, Mongolia and Morocco followed over 37,000 individuals in total.

The studies, conducted by researchers affiliated with US-based non-profit Innovations for Poverty Action (IPA) and The Abdul Latif Jameel Poverty Action Lab (J-PAL) - a research centre at the Massachusetts Institute of Technology (MIT) - found that small, short-term loans generally do not lead to increased income, investments in children's schooling or substantial gains in women's empowerment.

"The studies do not find clear evidence of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators," the introductory paper to the studies read.

Across all six studies, researchers conducted randomised evaluations in which one group of potential borrowers received access to micro-credit, while the other group received no such offer.

By comparing outcomes between these two randomly chosen groups, researchers were able to identify the effect of expanded access to micro-credit on business activity, financial behaviour and household welfare.

The results showed modest, but not transformative, improvement in the lives and financial well being of individuals one to four years after they accessed micro-loans.

All studies found some evidence of expanded business activity but these investments did not often result in significant increases in profits.

"These loans do help but the changes are not transformative, certainly not transformative enough to justify charitable donations to the standard micro-credit model," said economist Esther Duflo, co-founder and co-director of J-PAL.

Duflo suggests that researchers and non-profits should focus their attention on other approaches for financial inclusion for the poor.

"We must think beyond the standard micro-credit model," said economist Dean Karlan of Yale University and founder of Innovations for Poverty Action.

The studies were released in a paper that appeared in the American Economic Journal: Applied Economics.