Toxic Charity: Microlending (3): Does Microlending Work?

This post is part of the series Toxic Charity: How Churches and Charities Hurt Those They Help (And How to Reverse It).

For reference, here’s the version of the book I’m using.

In this post, I also cite Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. Citations from each book are marked with the short version of the book’s title. Unmarked citations are from the same book as the previous citation.

In the previous post in this series – and sub-series – I wrote about the trade-off in putting social standing, trust, community interdependence, etc. up as collateral against a loan. We should not be dismissive of the shame that can come from being unable to pay back a loan, particularly when personal financial difficulties can pass the cost of that loan onto other members of a person’s trust group. Perhaps, though, the risk of that shame is worth it. Perhaps microlending is so effective at lifting people out of poverty that it is worth leveraging the relationships of the people it is intended to help.

Fortunately, Abhijit Banerjee and Esther Duflo partnered with Spandana, a microfinance firm, to evaluate their program in Hyderabad, India. What they found was that microfinance – the term they use in their description, which encompasses more than just lending – was effective… within limits:

People in the Spandana neighborhoods [Spandana had gone into some neighborhoods in Hyderabad, while others were left as a control group] were more likely to have started a business and more likely to have purchased large durable goods, such as bicycles, refrigerators, or televisions… those who had started a new business were actually consuming less, tightening their belts to make the most of the new opportunity… households started spending less money on what they themselves saw as small “wasteful” expenditures such as tea and snacks.

On the other hand, there was no sign of a radical transformation. We found no evidence that women were feeling more empowered, at least along measurable dimensions. They were not, for example, exercising greater control over how the household spent its money. Not did we see any differences in spending on education or health, or in the probability that kids would be enrolled in private schools. And even when there was detectable impact, such as in the case of new businesses, the effect was not dramatic. The fraction of families that started a new business over the fifteen-month period went up from about 5 percent to just over 7 percent – not nothing, but hardly a revolution. (Poor Economics, p. 171)

As Banerjee and Duflo write, there need to be more studies to ensure that these results were not an anomaly (and the reference another study with “more lukewarm results” (p. 172)). These results, however, are mildly promising. Greater business ownership, lower consumption on ‘frivolous’ or ‘wasteful’ items like tea and snacks and more access to durable goods are all potentially good things. This post and the previous post point to two things that we must keep in mind, however.

First, microloans are contingent on putting trust and community interdependence up as ‘collateral’ against loans and, as we’ve seen, that represents a potentially serious risk for borrowers. We must ask whether it is ethical to impose this risk on the global poor in exchange for the opportunity to access credit. Moreover, Christians have a special responsibility to ask whether imposing such a risk is Christ-like. There may be potential in microlending, but we cannot remain unaware of the position we are asking the poor to be in.

Second, microlending is probably not the revolutionary force many proponents seem to think it is. While the results of microlending are generally good, they are also modest, and there are important limits on what microlending can accomplish. These limits will be discussed in the next post in this series. What is important to note is that the potential of microlending – and microfinance more broadly – should not be oversold: microlending under the current model can help some globally poor people become marginally better off, but it is unlikely to transform a neighborhood, village or society.

All of this is to say that we must ask at least two questions. First, are the modest gains brought about by microlending worth the costs and risks associated with it? Second, is microlending more effective than other methods of helping the poor? The second of these is especially important in the case of an argument like the one Lupton is presenting in Toxic Charity. After all, Lupton is not simply arguing that microlending is one of many tools in the philanthropic toolbox, but that it is substantially better than simply giving people what they need to support themselves because the second of these options causes harm.

Unfortunately, there are no simple answers to these questions and it will likely be some time – perhaps even generations – before we know just how effective microlending and microfinance are at lifting people out of poverty. However, we should keep these questions in mind both as we move forward in this subseries and as we observe microlending over the coming years and decades.

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