Microfinance

Microcredit is typically defined as the provision of small loans to impoverished borrowers who lack access to formal financial services, mainly due to lack of collateral, steady employment and/or a verifiable credit history. Its main aim is to support entrepreneurship and alleviate poverty; it also aims in many cases to empower women, and to increase investments in human capital.

While a number of recent studies confirm, for various settings, that microcredit may stimulate business creation, its impact on borrowers and their households, and its ability to alleviate poverty, remains ambiguous and is the subject of intense debate.

Researchers at EDePo add to these discussions with rigorous evaluation studies on how microcredit affects the well-being of the poor, as well as studying its effects on the lending institutions. One study has looked at the impacts of offering microcredit to poor women in Mongolia under different liability contracts - group and individual. It finds a positive impact of group loans on entrepreneurship and food consumption, but detects no significant impact on enterprise ownership and a smaller impact on consumption of loans under individual liability. Another study has looked at the impacts of offering microfinance to so-called ‘marginal borrowers’, i.e. those who were previously deemed to be too risky to lend to, in Bosnia and Herzegovina. It finds that ‘marginal’ clients are not a financially viable group for the lending institution and that the impacts on the borrowers’ households are ambiguous. Further ongoing research in India looks at extending microcredit for the purpose of investing in better sanitation, which could have the potential to improve households’ health outcomes and hence individuals’ productivity.