Microloans, A Tool For Alleviating Poverty

By Archan Sen

Microlending historically has had a very mixed reaction. Originally, it was used in Bangladesh. After massive success there, it exploded in popularity, however, some studies claimed that microfinancing was ineffective and increased poverty, which caused a rapid decline in its use. Yet, after the original studies, numerous more have proven the exact opposite. For example, Quanda Zhang’s study1 uses a cross-disciplinary analysis from 106 countries across 16 years, and finds a statistically significant, negative relationship between microlending and poverty, showing that microlending fulfills its goal. Further - Gregor Campbell2 indicts the criticisms of microlending. All of the critiques of microfinance are predicated off of an argument about the cycle of poverty, and how microlending debt traps people that are already in economically unfavorable conditions. However, this doesn’t assume the fact that microloans encourage businesses that create wealth, and the microlendees are not only able to pay back the loan, but also create excess wealth that they keep themselves.

Further, microlending also helps work towards gender equality. A study published in Published Economics Lecture finds that if 15% of women were involved in microlending, the Gender Inequality Index would get halved. Microfinancing has multiple factors that all work together to contribute to the increase in equality. First, microlending increases women’s wealth - creating businesses causes wealth to flow to them, which increases empowerment. Second, it reverses traditional gender roles - rather than women working in the house while men go out and earn money, microlending to women allows the opposite to happen, which both decreases stigma of men working at home, and helps dissipate the strict societal gender barriers. Finally, studies4 show that women are more likely to invest in intergenerational assets, such as building schools in their community, so that women can gain education, which is the highest predictor of success. All three of these outcomes from microlending work in tandem to create a more equitable society, stemming from microfinance.

Finally, microlending creates a more sustainable and flushing economy for rural villages. It creates a sustainable way to create jobs, and helps unlock trading between people. Microfinancing helps create numerous small businesses, which in turn builds upon itself and creates wealth at the bottom of the socioeconomic ladder. The people that benefit from the business then go on to buy goods from other businesses. That allows people to create compounding wealth within a society.

Thus, even though past literature has been divided, we can see that microlending is decisively beneficial for alleviating poverty, achieving gender equality, and building flushing economies. All the negative reactions are predicated off of the same flawed study, when newer and better data shows that the exact opposite of that study is true.

Zhang, Quanda. “Does Microfinance Reduce Poverty? Some International Evidence.” The B.E. Journal of Macroeconomics, vol. 17, no. 2, 10 May 2017, www.degruyter.com/document/doi/10.1515/bejm-2016-0011/html, 10.1515/bejm-2016-0011. Accessed 10 Aug. 2021.

CAMPBELL, GREGOR. “Microfinancing the Developing World: How Small Loans Empower Local Economies and Catalyse Neoliberalism's Endgame.” Third World Quarterly, vol. 31, no. 7, 2010, pp. 1081–1090., www.jstor.org/stable/27896601. Accessed 10 Aug. 2021.

“Microfinance and Gender Inequality: Cross-Country Evidence.” Applied Economics Letters, 2017, www.tandfonline.com/doi/full/10.1080/13504851.2017.1287851. Accessed 10 Aug. 2021.

Elizabeth Erika Killion. “Ethics and Effectiveness of Microloans for Women in Developing Countries.” Scholarly and Creative Work from DePauw University, 2018, scholarship.depauw.edu/studentresearch/100/. Accessed 10 Aug. 2021.