How are micro-loans used?
A frequent question that I get from friends and family members about the microfinance projects I work on for IPA is, “What do people actually do with the loans?”
Perhaps these questions come from confusion over the large differences between the economies of the developed versus developing world. About 13% of the labor force in the developed world is self-employed versus about 49% in the developing world (my estimates using ILO data). Additionally, the industries of the self-employed in the developed world and the developing differ a lot (in the developed world people think of writers and accountants when they hear self-employed, not rickshaw drivers or fruit stand owners).
In the Philippines, where I am currently based, entrepreneurs use micro-loans to invest in many types of businesses, including Sari-sari Stores (translates to "Thing Stores"—basically convenience stores), “Carenderias” (small restaurants with prepared food), fruit and vegetable stands and stalls (selling products such as mangos or coconut juice), motorized tricycles and other "transport sector" businesses, and farms and agricultural related businesses are just a few of many examples.
It may also surprise some to learn that mico-loans aren't just for business use; recipients use them for household consumption and investment as well (however, some specific microfinance products are more tailored towards small businesses others towards consumer lending). For instance, many use micro-loans to pay for their child's school fees, to install a new roof on their house, to repair the motorcycle that they use to get to work, for food purchases in hard times (what economists refer to as "consumption smoothing") and many other uses. IPA researchers Dean Karlan and Jonathan Zinman studied the impact of consumer credit on low-income borrowers in South Africa. Using a randomized controlled experiment, they found that expanding credit access had a positive effect on many measures of well-being, including income and employment (you can check out the full paper here).
Print this page
Share
Comments
There are lots of things you
There are lots of things you can use in a loan. You get a loan for any reason, right? It not just a matter of business but as well as in your own needs.
micro-loans aren't just for business use
[...]It may also surprise some to learn that micro-loans aren't just for business use; recipients use them for household consumption and investment as well (however, some specific microfinance products are more tailored towards small businesses others towards consumer lending). [...]
Similar question about microfinance
I get the same question all the time as well. An interesting question that often comes after that question is; "why don't you encourage people to save instead of giving them debt?"
To answer the question, I like the paper that Dean Karlan, Nava Ashraf and Wesley Yin wrote in 2006: TYING ODYSSEUS TO THE MAST: EVIDENCE FROM A COMMITMENT SAVINGS PRODUCT IN THE PHILIPPINES found here http://poverty-action.org/sites/default/files/I12_TyingOdysseys_0.pdf. The authors describe a commitment savings product that required the savers to restrict access to the account until some point in the future. The idea being that if access is restricted, sort of like a piggy bank that you can't break, savings would be greater and some measure of well-being would increase when the restriction was lifted. An idea that the paper poses is that the mechanism of saving is similar to paying off debt, only the time-frame is different. With savings, you are delaying the use of money until some point in the future; and with credit, you are using money now, and restricting the use of that money in the future when you have to pay back the loan.
Of course, there is no conclusive evidence about which mechanism is better in which context, but savings and credit are clearly both useful tools to improving well-being.
Post new comment