Microcredit is a mirage, says UK study

A British government-funded international study says there is no credible evidence that microcredit has helped cut poverty and empowers women.

The 'systematic review' dismissed well-known studies done so far claiming positive impacts on women.

The report says 'unreliable impact estimates' based on 'weak methodologies' and 'inadequate data' have contributed to the creation of perception that micro-funding worked.

It also blames the myth of micro-credit on 'anecdotes' and 'inspiring stories' propagated by the powerful micro-credit industry.

The damning report, Evidence of the impact of microfinance: a systematic review was supported by the UK's overseas development arm DFID.

The news agency has obtained the full report, dated August 2011.

'Despite the apparent success and popularity of microfinance, no clear evidence yet exists that microfinance programmes have positive impacts,' said the report, co-authored by Maren Duvendack, Richard Palmer-Jones, James G Copestake, Lee Hooper, Yoon Loke and Nitya Rao.

This report seemingly pours cold water on the rigorous microcredit campaign especially in the West and lends further credence to the contention that is fast gaining ground that microfinance fails to pull the hard-core poor out of poverty.

Late last year, Danish director Tom Heinemann in an investigative TV documentary 'Caught in Micro debt', which was aired on Norwegian television, questioned microcredit operations.

It uncovered documents revealing nearly $100 million in aid funds to Grameen Bank were transferred out of Grameen Bank to a private entity, Grameen Kalyan, set up by Muhammad Yunus, without the knowledge of the donor Norway's NORAD.

The DfID review said the concept of microcredit was 'first introduced in Bangladesh by Nobel Peace Prize winner Muhammad Yunus'.

'Professor Yunus started Grameen Bank more than 30 years ago with the aim of reducing poverty by providing small loans to the country's rural poor (Yunus 1999).'

The Department for International Development, is the UK government ministry that manages Britain's international aid and works to get rid of extreme poverty.

'There have been four major reviews examining impacts of microfinance (Sebstad and Chen, 1996; Gaile and Foster 1996, Goldberg 2005, Odell 2010, see also Orso 2011).

'These reviews concluded that, while anecdotes and other inspiring stories (such as Todd 1996) purported to show that microfinance can make a real difference in the lives of those served, rigorous quantitative evidence on the nature, magnitude and balance of microfinance impact is still scarce and inconclusive (Armendáriz de Aghion and Morduch 2005, 2010).

The review continued: 'Overall, it is widely acknowledged that no well-known study robustly shows any strong impacts of microfinance (Armendáriz de Aghion and Morduch 2005, p199-230).'

Bangladesh's top microcredit operators include Association for Social Advancement, Grameen Bank, Brac, which together wield enormous power in the country socio-political life.

Critics put the stunning loan recovery rate of nearly 98 per cent down to the harassment of villagers from the debt collectors. Some argue that people can quickly sink into a cycle of debt, with many lenders charging exorbitant rates of interest.

In the Indian state of Andhra Pradesh, numerous reports of suicides amongst loan takers have spread around the world, calling into question the benefits from microcredit.

'Because of the growth of the microfinance industry and the attention the sector has received from policy makers, donors and private investors in recent years, existing microfinance impact evaluations need to be re-investigated.

'The robustness of claims that microfinance successfully alleviates poverty and empowers women must be scrutinised more carefully.'

The study found 'no robust evidence of positive impacts on women's status, or girl's enrolments'.

'Our report shows that almost all impact evaluations of microfinance suffer from weak methodologies and inadequate data (as already argued by Adams and von Pischke 1992), thus the reliability of impact estimates are adversely affected.

'This can lead to misconceptions about the actual effects of a microfinance programme, thereby diverting attention from the search for perhaps more pro-poor interventions.

'Therefore, it is of interest to the development community to engage with evaluation techniques and to understand their limitations, so that more reliable evidence of impact can be provided in order to lead to better outcomes for the poor,' the study concluded.

Source : New Age