Does Microcredit Really Help Poor People ?

ver since microcredit first began to capture public attention 25 years ago, the usual story line has been that it is a tool of extraordinary power to lift poor people—especially women— out of poverty, by funding their microenterprises and raising their incomes. This picture has been buttressed by hundreds of inspiring stories of microentrepreneurs who used tiny loans to start or expand their businesses, and experienced remarkable gains not only in income and consumption but also in health, education, and social empowerment. But how well do these individual anecdotes represent the general experience of the hundreds of millions who have gotten microloans and other microfinance services? Is microcredit—or microfinance more generally—being oversold? 1 A Claim in Doubt Unfortunately, scientific testing of the impact of microcredit is surprisingly difficult. If we find that people who got microloans are doing better than those who didn't, does this mean that the loans caused the improvement? Maybe not. There are several other plausible explanations—for instance, that the people who apply for and get the loans may have more drive and ambition, in which case they would probably tend to do better than others whether or not they get the loan. Dozens of studies have looked at the experience of people who have received microloans. The challenge has been to identify a control group for comparison: it is difficult and expensive to find a group of people who are like the loan recipients in all relevant ways except for not having gotten a loan. Up until recently, most of the few studies that addressed this challenge seriously found that microcredit produced important economic and social benefits. But there has always been controversy about the validity of these studies. 2 A recent analysis of the most widely cited one raises grave doubts about its methodology and conclusions (Roodman and Morduch 2009). These doubts probably apply to some of the other early studies as well. In the last three years, a few researchers have started using randomized controlled trials (RCTs) to test microfinance impact. They select a large enough group of study subjects so that when it is randomly divided, the two subgroups can be presumed to be statistically identical. The first subgroup gets loans; the second subgroup does not. If one subgroup experiences better outcomes than the other, the researcher can be reasonably sure that it is due to the loans, because the loans are the …