Access to debt can often seem like a blessing and a curse. At any given time, the opportunity to borrow capital to purchase assets can be had seemingly, if used car commercials are to be believed, for free. Yet repaying debt can often seem insurmountable; lives are ruined, jobs are lost. Seemingly the only thing worse than being buried in debt is not having access to it in the first place. The developing world has long faced an inaccessibility of capital to retail consumers. Yet the tide here may be turning – Microfinance institutions (MFIs) are reshaping the landscape in surprising ways.
MFIs are, broadly speaking, providers of small-scale lines of credit to low-income individuals or groups for use in self-employment. Similar to venture capitalists if they funded the purchase of individual cows, their definition and scope evolves along with the definitions of “low-income” and “small-scale”. Loans are collateral-free and primarily target vulnerable populations, using capital as a method of empowering entrepreneurialism in the developing world. Programs can be for-profit or non-profit, with both banks and international institutions offering stand-alone savings products.
Traditionally, microfinance firms facilitate inclusion and strive to make capital more accessible for vulnerable populations. Given their mandate, it’s no surprise they’ve been widely heralded as a development tool in the Global South. Their overall impact remains questioned – studies released have contradicting conclusions whether the theory of change as it applies to microcredit actually applies.
Individual programs often have success stories and can attest to individuals who have been extended credit going on to build successful ventures. Yet two studies conducted in 2014 by Abdul Lateef Jamal Poverty Action Lab (J-PAL) and Innovations for Poverty Action (IPA) respectively explain that demand for MFIs sits at an average of 31%, a lower than expected take-up range. And while an increase in business ownership and revenue was demonstrated in places where programs were installed, profit generation did not proportionally increase in turn.
One area where MFIs did show success was in the volume of freedom afforded to households regarding purchasing. Individuals or groups who were issued microcredit lines found higher autonomy in household spending and managing risk. But it would be an exaggeration to say that the core benefit of MFIs was empowerment; a survey of studies showed that reception of microcredit had no notable impact on children’s schooling, and only one in four has an impact on positive empowerment for women.
Perhaps the reason for the somewhat disappoint results is the aforementioned low adoption rates. MFIs are not as widely adopted by the general public as perceived, therefore their negative or positive impacts upon overall development are not large enough to move the overall baseline. Increasing access continues to be the core concern – MFIs can only bring the sought-after development if they reach the consumers that will benefit most.
From improving rates to better targeting specific outcomes, MFIs could stand to reduce the risk of taking on debt. And at the end of the day, for-profit companies issuing debt to individuals will never be a perfect solution, no matter how small the amount. The hope is that not every used car ends up being quite so sour.