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Micro-finance can make the poorest poorer, study warns

19 Sep 2012 News

The Institute of Education has praised micro-finance as a means of reducing poverty, but warns that caution must be used when lending to the very poorest. 

The Institute of Education has praised micro-finance as a means of reducing poverty, but warns that caution must be used when lending to the very poorest.  

In a Department for International Development-commissioned report that compiles worldwide data, researchers from the EPPI-Centre at the Institute of Education, University of London have concluded that micro-credit can end up making people poorer as well as better off – and in fact the poorer the borrower is, the more in danger he or she is of suffering in the long term.

Micro-credit – giving minor loans for establishing a small business, such as a market stall – is designed to be a stable way to help people out of poverty.

Poorest are at most risk

But the study, which assessed the 17 most relevant international studies on micro-finance and which was conducted in partnership with the Centre for Anthropological Research at the University of Johannesburg, reports that it is strongly advisable to lend only to those who already have some financial security.

This allows them to make loan repayments even if their businesses do not generate a profit immediately, it said. Since the very poorest cannot do this, they are at risk of getting into debt and further financial hardship.
 
Leader of the study Dr Ruth Stewart said that “considerable care” should be taken when policymakers and creditors are deciding whom to target with micro-credit services, lest they make the poorest even poorer.

Micros saving – safer than credit

The researchers judge that micro-saving, where the individual saves small amounts over a long period of time with organisations' savings services, is the “safer” intervention and that “arguably the poorest of the poor should not be offered micro-credit without careful consideration of the implications for their lives of increased debt”.
 
They say that having bank accounts helps people to increase their assets, and the researchers describe commitment savings accounts – which require clients to agree to save a certain amount until a particular date – as “particularly promising”.

Another conclusion the researchers reached was that those with higher levels of education or training were the most likely to benefit.

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