Microcredit and Payday Loans

Microcredit loans are popular with poor people because they are payday loans to people without paychecks.

We recently received this comment on a post on microfinance,

May I suggest a few hours at http://www.microfinancegateway.org/ might help answer some of the questions you raise. Certainly credit can lead to problems. But the misuse of anything can. The people I have read and heard who have seen the changes in the lives of people who use their microcredit loans to improve their businesses strongly favor microcredit. Perhaps if you looked more closely, you would too.
John

That site describes itself as an “online resource for the microfinance industry”. An industry site may not be the best place to look for independent evaluations. Nevertheless, this interesting article can be found on the site,

The truth is that microcredit changes poor people’s lives marginally. It is a stretch to go from the modest microcredit impacts that emerge from the little serious research we do have11 to suggesting as the UN’s International Year of Microcredit website does, that road side sellers of a few bananas, used clothes, a few tea bags, or even 50 kilos of rice, are budding entrepreneurs standing at the threshold of participation in the wider economy, and who play a key role in wealth creation. It’s just not so.

Microcredit loans help smooth out fluctuations in income, maintain consumption levels during lean periods, and provide buffers against sudden emergencies. As such they are extremely useful, but much more like payday loans than venture capital investments.

We don’t really know how useful microfinance is. As is usually the case in the aid industry, there is systemic failure when it come to providing rigorous, independent evaluations of costs, benefits, and impacts.

Update: See also this post on the Becker-Posner Blog.

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5 thoughts on “Microcredit and Payday Loans

  1. I’m trying to figure out if you’re in favor of microcredit or not. I think that microcredit is far more beneficial than aid. It may be a meager impact, but at least it’s some kind of impact. We are giving people the opportunity to provide for their families themselves instead of relying on handouts. I can’t help but think that microcredit will help bring dignity to the poorest of the poor. And who knows, maybe we’ll see the fruit of microcredit in the next generation – those who actually had a chance to receive education they otherwise wouldn’t have had all because of microfinance.

  2. I am in favor of microcredit. I don’t agree with the U.S. military’s attempt to ban microcredit near military bases (they call it “payday loans”). As a development tool microcredit is overhyped and understudied. Microcredit loans are most likely a success for exactly the same reasons that payday loans are so widespread. They smooth out the consumption cycle, and hungry or desperate people are quite willing to pay high interest rates for that. As I said in the post, microcredit loans are payday loans for people without paychecks.

    Since microcredit loans in poor countries are collateral free, social pressure must be used to insure repayments. There are reports of suicides among women unable to repay loans. What are the suicide rates for defaulters? I don’t think the microcredit industry is in any hurry to carry out a study.

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