How to Take Advantage of the Full Potential of Microfinance?

Although microfinance has been promoted as a means of promoting economic mobility in underdeveloped nations, the outcomes have been conflicting. Ben Roth and Natalia Rigol’s research examines how various loan strategies might benefit businesses more.

Institutions have given hundreds of millions of loans to people in poor nations in the 50 years since modern microfinance was developed as a strategy to combat poverty. These loans have repayment rates that might reach 98 percent.

The sector’s success appears to be evident from those indicators alone, but how much have the loans actually helped people’s lives? According to Natalia Rigol and Ben Roth, tracking down that question has been more challenging.

Rigol and Roth, both assistant professors at Harvard Business School and development economists, are among the researchers looking for ways to make the upcoming generation of microfinance instruments even more revolutionary. They recently spoke with the HBS Alumni Bulletin about their study.


Bulletin : One of the biggest surprises in microfinance has been the amazingly high loan recovery rates of around 96 or 98%. How do you interpret it?

Ben Roth: A measure of success is financial integration; And perhaps the fact that there are new borrowers borrowing and repaying is proof enough that this industry has had a tremendous impact. But another view that we deeply sympathize with is that after the 30-year history of microfinance, roughly between 2005 and 2010, large-scale randomized controlled trials emerged, all showing the same surprisingly tepid message. people. .

Natalia Rigol: People expected to see changes in household income, business growth, and consumption, but overall, those tests found no changes. It is quite controversial. When we talk to microfinance practitioners about this evidence, it can be difficult for them to really stick with it because of their work in the field and the stories they hear about lives that have been covered. change.

Roth: Meanwhile, there is a parallel work that tells a very different story. In randomized controlled trials around the world, instead of providing loan access, a one-time cash grant has been shown to have a transformational impact on livelihoods and businesses in six months, one year, five years, 10 years later. We’ve learned from these studies that there are many small business owners who can put their capital to good use, but microfinance has yet to unlock these potential opportunities.

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