Against this backdrop, the European Bank for Reconstruction and Development
(EBRD) launched a project in 40 Mongolian villages from 2008-2009 to assess the impact of business startup microcredit lending. Does it reduce poverty? And which loan structure is best?
The second question is key because the microfinance industry is in transition, shifting from the group loans pioneered by Grameen Bank to individual lending. In a group loan, the borrowers are liable for each other’s payments, meaning that everyone goes into default if one member doesn’t repay. This, naturally, can be very problematic.
But there are scant data on the relative impact of the two models regarding business creation, poverty reduction, etc., the bank notes. So, in cooperation with Mongolia’s XacBank, it offered group loans to women in 15 villages and individual loans to women in another 15 villages. Ten villages formed the control group.
Some highlights from the findings
, released last month:
- The results at least partially support the growing body of evidence that microfinance doesn’t make much of a dent in poverty, as incomes remained static in both loan groups. It might just be too early to observe significant change, the bank notes. But more and more research suggests that micro-finance is no poverty slayer, contrary to early optimism.
- As regards business creation and household well being (measured by food consumption), the group loans were more effective. Women in that program were 29 percent more likely than the control to operate a business. They also put more food, including fresh produce, on the table. For individual loan recipients, no impact was observed.
- Much of the lending didn’t go towards small business creation. In fact, half of the money went to consumer items. By survey’s end, the households in both loan programs were much more likely to own a VCR or radio than those in the control.
Conclusions? The bank posits that group loans had more impact because borrowers in a collective are less prone to risky investments or “paying it forward,” so to speak, by lending on to family and friends. On poverty reduction, the EBRD notes that less-educated women in both groups seemed to benefit more, which is promising because education is “a proxy for long-term poverty.”
But, to its credit, the bank acknowledges the ambiguities and points to research that generally challenges
the poverty cure thesis. We’ll get another look at this question later this summer, when the EBRD publishes research on the impact of microcredit during the financial crisis in Bosnia and Herzegovina.