The Washington PostDemocracy Dies in Darkness

If you read one thing about microfinance, read this

A summary of seven studies in one figure, via the non-profit research organizations Innovations for Poverty Action (IPA) and the Abdul Latif Jameel Poverty Action Lab (J-PAL)

These days, every story about microfinance begins in 2006, when Muhammad Yunus and Grameen Bank received the Nobel Peace Prize for their revolutionary product: small loans for the poorest.

“Lasting peace can not be achieved” wrote the Nobel organization “unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights.”

Unfortunately, in 2006 the evidence was not in. It made no more sense to give microfinance a peace prize than give one to a sitting president in his first…

Oh wait. I think I see a pattern.

Well, the evidence has arrived. If you want to read one thing on microfinance, I vote for this new policy brief: a summary of seven randomized control trials on four continents, from the research organizations Innovations for Poverty Action and the Poverty Action Lab.

The punchlines:

  1. Only about one in four or five households wanted a small loan.
  2. Some of them used the money to grow their very small businesses. But this rarely led to higher profits.
  3. None of the seven studies found a significant impact on household income.
  4. And there’s no evidence it empowered women or led more children to go to school.
  5. But the loans give a little freedom. People make the same money as before, but in different activities that they chose.

In the end, you can sum it up like this: microfinance is a useful little product. People like impersonal finance. That’s one less relative to hit up for cash. I think of it like my family’s first microwave, in 1984: it didn’t make us better off in ways that are easy to measure, but life was a bit more convenient.

How to go from convenience to real poverty alleviation? I think about this a lot. A good deal of my research looks what happens when you just give the poorest cash. The answer? They save and invest it, and are better off over time. Especially when it’s targeted at people who are interested in and able to start small businesses.

This is a slight overstatement. The evidence is still coming in. But cash looks more promising than credit at helping the world’s poorest. Yet on some level it’s the same solution: giving people capital so they can invest. One kind is free, and one is costly, and has to be paid back.

The solution, I think, is to make credit a little more like cash: cheaper. Microfinance can be expensive. Interest rates of 20 to 100 percent a year are common. One reason: it’s expensive to make $100 loans.

Unfortunately, “reducing transaction costs” does not make a sexy ad campaign. Or blog post. So too little work is going on. That is a shame.

So that was the first thing you should read on microfinance. If you want a second, try Abhijit Banerjee’s terrific review of the evidence. Or his article with Dean Karlan and Jonathan Zinman.

And whatever gets the 2015 Nobel Prize for Peace? You may want to run the other way.