Second generation of microcredit program may be doing more harm than help
Second generation of microcredit program may be doing more harm than help
- October 29, 2015
- CEPP study finds that fewer restrictions leads to money being used as emergency loans, not for long-term investments
Providing microcredit to the impoverished has been celebrated as a way to alleviate
poverty, aid entrepreneurs and empower females in low-income areas. However, a new
study published by the Center for Economics & Public Policy at UC Irvine finds that
changes within the program’s structure have hindered its success in improving quality
of life for those it aimed to help.
“The first generation of microcredit organizations offered small loans, primarily
for business purposes, to peer groups who guaranteed each other’s repayment,” said
Jennifer Muz, UC economics graduate student and study author. “After their success,
a second generation of private lenders entered the market, offering loans to individuals
with few restrictions on loan use.”
She examined the impact of these second generation loans through an evaluation of
Banco Azteca, a private bank in Mexico that offers less restrictive microloans to
low-income households.
The loosening of restrictions, she argued, led to money being used in ways that resulted
in worse long-term outcomes. Funds were used as emergency loans to cover short-term
expenses rather than to purchase assets or invest in small business development, as
was the intention of the first generation of microfinance organizations. This limited
the possibility that future income streams would help with the loan’s repayment.
“We should be cautious in judging this second generation of microcredit organizations,
which are more likely to offer individual liability loans without restriction on loan
use, in the same light as the first generation of microcredit organizations, which
offer group loans and focus on small business development,” she says. “Modifications
in these fundamental features could be undermining the qualities of microcredit that
made it attractive in the first place.”
The full study is available online at http://www.cepp.uci.edu/CEPP%2008-21-2015%20Microcredit%20Practices-Muz_Paper-2.pdf.
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