Microfinance: An Economic Analysis of Banking to the Poor

Although foreign aid has yet to prove itself as an effective tool in combating poverty, critics of microfinance are quick to focus on the lack of evidence of macroeconomic effects surrounding microfinance. Despite the lack of positive evidence for foreign aid and government intervention, opponents have repeatedly critiqued microfinance for being unable to estimate the macro impact of microcredit. They claim that the lack of significant evidence further weakens the case for microfinance. Critics often use personalized stories and individual examples to make their argument. However, the majority of evidence surrounding microfinance indicates otherwise. As noted previously, nearly all impact studies of clients of microfinance schemes are better off and have higher more reliable incomes than had they not participated at all. It should be noted that microlending is a choice. If microfinance was harmful, it would eventually be bankrupt due to a lack of customers. Microfinance attracts clients because it is the best option available. Its interest rates are lower than loan sharks and other financial institutions, MFIs provide services that other banks choose not to, and they have beneficial impacts on their clients. If individuals were unable to repay their microloans and entered a ‘death spiral’, eventually people would stop borrowing. Others would be warned and therefore not borrow. The high repayment rates such as 95 per cent to 99 per cent infer that individuals are able to repay loans. If the debt was too much to handle, one would see evidence of non-repayment. Eventually, people would be unable to repay their loans. Furthermore, studies that have examined the issue repeatedly find that clients are able to grow their incomes and net worth.