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Organizations like Kiva (also discussed in a mostly unrelated question) offer small loans to low-income people in under-developed countries. From their web site:

Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services.

Most, if not all, of the evidence that microfinance works provide by Kiva, is anecdotal.

The site also adds the qualification to its claims that it is also recognized that is not always the appropriate method (source).

I'll accept as granted that there are cases where micro finance has helped certain individuals get out of poverty. But is there any evidence that providing these sorts of loans actually has any measurable (positive or negative) impact on community poverty?

  • those would be short term solutions only to quote the warning I hear in every commercial about car or mortgages "borrowing money costs money" – ratchet freak Oct 20 '11 at 11:47
  • @Flimzy - I do not think they are. However the problem we have is that we have too much debt not that we have debt at all. Carrying a reasonable amount of debt is good for the economy because you money works for several people. And these loans are very small I read somewhere $5-10 and up to $100 business loans. I am trying to find the source I think i read it in Newsweek or Time. – Chad Oct 20 '11 at 13:15
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    @Chad: You're right about the interest rates, at least in the case of Kiva. There's a 0% return on the investment to lenders, but borrowers pay a (relatively high) interest rate. kiva.org/about/microfinance#interestRatesAreHigh – Flimzy Oct 20 '11 at 13:19
  • @Flimzy: This is the article indicates that Kiva is quite kind: forbes.com/forbes/2008/0107/050.html – Chad Oct 20 '11 at 13:34
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    This question may be better on Economics SE – Chad Oct 20 '11 at 15:31
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The Microfinance Wikipedia article gives a good summary of the state of research here.

Research on the effectiveness of microfinance as a tool for economic development remains mixed, in part owing to the difficulty in monitoring and measuring this impact.

Here is a paper specifically commissioned by the Grameen Bank to look at the evidence, much of which is not anecdotal. It analyses the many studies that have been done, both by microfinance organizations themselves and independently.

This review of the literature provides a wide range of evidence that microfinance programs can increase incomes and lift families out of poverty. Access to microfinance can improve children’s nutrition and increase their school enrollment rates, among many other outcomes. Yet it would be imprudent to issue a blanket statement that “microfinance works,” for the simple reason that there is no one “microfinance” to test. The MFIs examined in this paper serve different types of clients with a variety of services, and they operate in extremely heterogeneous regions. None, no matter how effective, can be said to definitely answer the question of whether microfinance works as a poverty reduction strategy on a global basis"

There have also been criticisms, some of which has taken the form of "microfinance isn't the panacea it is thought to be", which doesn't mean it's bad, just that it doesn't work miracles. As Kiva themselves put it "Microfinance is not a silver bullet". There are acknowledged cases where it hasn't worked, and there are certainly problems that it hasn't addressed. No single approach is ever going to entirely cure a complex problem like poverty. But if the question is "can microfinance help cure poverty", the answer is a qualified "yes".

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    I'm not sure whether everybody knows the Grameen Bank. It's the organisation that started the microloan movement. It's no independent source. – Christian Oct 23 '11 at 22:49
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I don't think the answer is clear yet, but people are finally applying a little scientific method to the problem (especially properly randomised trials).

A number of recent studies are referenced on this review site (my emphasis).

One review study by the grameen foundation in 2010 (seemingly a fair summary and updating the summary quoted in another answer) reports:

Two of these studies (“The miracle of microfinance? Evidence from a randomized evaluation,” [2009] by Abhijit Banerjee et al. and “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya,” [2009] by Pascaline Dupas and Jonathan Robinson), when examined closely, report evidence of a number of positive impacts of microfinance on the lives of poor clients. Banerjee et al., find that the introduction of microcredit in Hyderabad, India, supports household borrowing and investment and supports the creation and expansion of small businesses. Dupas and Robinson study the effect of the introduction of savings accounts on business investment in Kenya, and find that formal savings accounts increase business investment and expenditure for women. The third study (“Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila” [2010b] by Dean Karlan and Jonathan Zinman) finds that the expansion of microlending to a new population in Manila, Philippines, leads to an increase in business profits for male borrowers only but has no overall effects on income or poverty. Banerjee et al. and Karlan and Zinman both test for, but do not find, evidence of social impacts of microcredit (such as women’s empowerment, increases in children’s school enrollment, or improvements in overall health and well-being). Collectively, these three studies suggest that over relatively short time periods, microfinance had positive impacts on business investment and outcomes but did not have impacts (positive or negative) on broader measures of poverty and social well-being.

So thats a fairly muted positive for micro finance. It isn't a miracle, but it seems to be better than nothing.

The topic is a lot bigger than can easily be summarised. It is worth reading Banerjee and Duflo's book on the subject, Poor Economics to get a broader overview.

  • Great link. Do you mind if I include it in my answer? – DJClayworth Oct 25 '11 at 13:56
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    Incidentally 'applying scientific method' hasn't definitively answered any other questions about economics, so I would be pessimistic about it answering this one. Economics is not entirely a scientific subject. – DJClayworth May 27 '12 at 3:21

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