Microfinance – contribution on poverty reduction: zero

Development agencies have promoted microfinance — the provision of small financial loans to poor people — because it is supposed to help poor people move out of poverty. After a comprehensive review of existing studies, with particular focus on recent randomized control trials, Roodman says that just isn't true. "On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero," he argues.

Roodman does find, though, that the while microcredit isn't a successful approach to poverty reduction, "it's not the financial equivalent of cigarettes." Wow. That's comforting.

Another reason for justifying microcredit is that it offers poor people, particularly women, greater control over their financial lives. Roodman says the evidence is mixed on that count too. Some women may have been empowered, but others have been forced to repay loans when it wasn't best for them. Cross-collateralization groups become burdensome, not emancipating, and at their worst, they lead to situations where people rob from each other to pay off their debts.

The third benefit is that microfinance represents a new industry that generates jobs and services. Roodman does say that the evidence is generally positive here. Microfinance institutions do "compete and innovate, cater to poor people, create jobs, and enrich the national economic fabric." According to Roodman, the cumulative amount of subsidized capital in microfinance by 2009 was $15.7 billion, and that has helped create a new industry. That's nice.

However, those billions could have helped create jobs in other industries, some of which — such as health, water, and sanitation — may have had a bigger impact on poverty than microfinance has had. To make a judgment, a comparative cost-benefit analysis would be necessary. And we couldn't throw in the benefit of poverty-reduction as a mitigating factor since that doesn't seem to be happening.

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