Emerging and Growth Markets | January 27, 2015

Uh-Oh: Microcredit Does Not Relieve Poverty

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Microcredit is not living up to its promise to relieve poverty, concludes new research published in January’s American Economic Journal.

Studies of microcredit programs in six countries “do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards,” according to policy research centers Innovations for Poverty Action (IPA) and The Abdul Latif Jameel Poverty Action Lab (J-Pal). “Nor is there robust evidence of improvements in social indicators.”

Microcredit, long considered an early success of impact investing, has been both hailed and criticized as a tool to help raise the incomes of the poor. The new research backs a broader array of microfinance tools, including savings plans and insurance products.

“We must think beyond the standard microcredit model,” said economist Dean Karlan, founder of IPA and co-author of one of the studies. “Modern microfinance—savings and insurance, and more flexible credit products—often has generated larger impacts than simple credit.”