2Accepting the inherent methodological flaws of most studies, it is nevertheless useful to look at theexisting research results related to the identified three categories.
Evidence of the impact of microcredit on poverty reduction
Chowdhury (2009), in a UN/DESA study referring to over 20 research papers, concludes that itsimpact on poverty reduction remains in doubt. Stewart
(2010, p. 6), in a review of 15 studies of
similarly conclude that microcredit has mixed impactsin relation to incomes of poor people. Many other studies come to similar conclusions.
reflectsstudies that found positive as well as negative impact. So it is worth looking at some details. Aninfluential research by Hulme and Mosley in 1996 found that microcredit had little, none or evennegative impact on the poor and poorest, but positive impact on the slightly better off (in terms of human or financial assets) and those who are already in business. Other studies, among others SIDA(2004), confirm these results.
(2009, pp. 20f.), in a randomized study of 104 slums inIndia for the Centre for Micro Finance, find that when provided with access to microcredit, existingbusinesses, better-off households and also households with a high propensity to start a businessreduce consumption of non-
initial investment, and improve their well-being.
Why does microcredit not lift poor people above the poverty line?
First, loans might be much lessfrequently invested in income generating activities than it is assumed. Although donors and manymicrofinance organizations claim that credit is predominantly provided to promising start-ups and
few studies attempt to verify the claimed useof the microloans. One research showed that borrowers usually and significantly underreport theirloan use for consumption purposes (stating it to be about one third to one half of the actual value).
The same research estimates that borrowers in fact spend 20 percent to 30 percent of their loans onhousehold expenses, health or education. But in a debate between Bateman and Roodman,Bateman claimed that only 20 percent of the microloans are really invested in micro-businesses
the rest being invested in consumption
a claim that Roodman did not contest.
No wonder, then,that the impact of microcredit is lower on income generation than on more consumption-orienteduses.Second, credit alone does not turn a poor person into an entrepreneur: entrepreneurial motivation,skills and opportunity are also required (see also PS Brief #1). In most countries, being a micro-
entrepreneur means the equivalent of not having a job. As so-
usually invest in low skill - low capital businesses such as retail, where price competition is intensebecause of overcrowding. Hence, they often do not manage to improve their income situationthrough these business activities.
Why do the poorest benefit less from microcredit than the better off?
First and foremost, thereappears to be a bias in the selection of clients by microfinance institutions: many microfinanceinstitutions do exclude the poorest, as this might endanger their repayment rate, or because there isa methodological bias in client selection. Instead, they focus on those clients that
above mentioned focus of donors confirms this.
Second, the poorest often exclude themselves from micro-borrowing, as they are too risk averse orlack the confidence.
Third, while the better-off may have to struggle to generate additional income from their businessactivities, the poorest will have even more problems.