Limits to microfinance?

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The microcredit movement has been built on the assumption that the poor need credit to invest in microenterprises, which will help them get out of poverty. Household survey data from Indonesia suggest otherwise, with substantial use of microcredit for consumption rather than investment purposes.

The authors, Don Johnston and Jonathan Murdoch, also find a large degree of credit aversion even among households that were considered credit worthy by microcredit officials. This paper was presented at a recent conference on Access to Finance.

Authors

Bob Cull

Lead Economist, DEC

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Tony O'Dowd
April 17, 2007

I have also noticed (in PNG, Solomon Islands and Zimbabwe) that microcredit/finance is used extensively to facilitate social consumption rather than to promote investment. In one project that I managed, the linkage between loans and school fees was especially noticeable. Every time the fees were announced, our loans went up substantially.

Far too often biased observers (usually with a banking background) equate the provision of financial services through microcredit with the idea that this is somehow fomenting entrepeneurial activity and productivity increase.

But such attitudes to the use of money are just as often derived from cultural factors, not economic analysis. Which is one reason people are often quite happy with traditional money lenders (even with much higher interest rates).

Microcredit as a driver of investment may well be effective in societies that are already predisposed to entrepeneurship eg Bangladesh, but the evidence is not so encouraging for societies without an entrepeneurial tradition.

April 24, 2007

Comentei isto aqui outro dia. Aqui vai mais um link para um artigo sobre o tema. Claudio...