Economic empowerment through the provision of "microfinance" services able to deal with small sums of money might, in theory, promote rapid economic growth and independence for those living in poverty. However, in practice, the evidence is too thin and ambiguous to support the call for expanding such projects, which don't appear to have a significant positive impact.
What is economic empowerment?
Charitable interventions aimed at economic empowerment include agricultural development (e.g. improving transport, irrigation, agricultural education, and distributing seeds, tools or livestock), and financial services (e.g. microfinance).
What is microfinance?
One relatively new intervention type that has received a lot of public attention is microfinance: the provision of financial services able to deal with the small sums of money managed by those in poverty. It includes loans (microcredit), savings (microsavings), and insurance (microinsurance), though to date most microfinance projects have focused on microcredit.
We don't yet have enough information to accurately assess and compare the cost-effectiveness of charities that focus on economic empowerment, but we can point out some of the issues that others have raised.
Agricultural development has received an unfavourable assessment from GiveWell who based their research on the World Bank's self-evaluation. Key difficulties besetting agricultural development programs include a lack of both local knowledge, and maintenance of the projects.
Because most microloans are repaid and in theory lead to economic growth, it is plausible that microfinance is cost-effective. As well as encouraging growth of businesses, it can help to smooth the financial volatility of very poor households, and to give women in particular more financial independence.
There are is a lot of research which should give us pause to reconsider. One difficulty is working out whether microlending raises people in absolute or just relative terms. Enterprises which receive the loans may benefit at the expense of others who do not receive the loans, perhaps growing only by putting competitors out of business. Another is that the anecdotal reports of people who use loans to start flourishing businesses may be unrepresentative of typical borrowing experiences. There are unusual horror stories as well as success stories, including reports of suicides following problems related to repaying loans.
The main problem for determining the efficacy of microfinance is the lack of empirical studies conducted in this area; the few that exist fail to find to any clear positive impacts. In a review of the literature, a report commissioned by the Department for International Development stated that "there is no good evidence to support the claim that microfinance has a beneficial effect on the well-being of poor people or empowers women."  Due Diligence, an expansive review of the evidence of microfinance, concluded that the available evidence did not support the idea that microcredit made a significant difference to the well-being of its customers, but was more optimistic about the possible impact of savings programs. Poor Economics, a review of a range of trials on alleviating poverty, concluded that microcredit "has real, if modest, effects on the lives of its clients. But it is not a silver bullet. In particular, it leaves open the next big challenge: how to lend to larger firms, so that microbusinesses can turn into viable enterprises." Microfinance was ranked only 22 out of 30 possible global priorities by the Copenhagen Consensus.
Most importantly, there is a lack of randomised control trials (RCTs) studying microfinance programs. Such trials are necessary to assess how a given individual would have fared without these programs so we can determine whether they helped her or not. One RCT found a microcredit program in the Philippines actually produced a small decrease in self-reported well-being,  while another in India found that despite an increase in new businesses, profits and household spending among microcredit recipients did not differ significantly from control areas.  By contrast, a study by Dupas and Robinson of a microsaving scheme in Kenya showed a major increase in business investment and daily expenditure for women in the treatment group.  The study's sample was, however, far too small to make wider extrapolations. It is worth noting that these trials tell us little about the impact of other forms of microfinance such as savings and pension schemes.
Existing studies are too few and too limited to draw conclusive findings about the cost-effectiveness of microfinance. In particular, the limited time frame may lead us to miss 'returns on investment' that accrue at later points in time. On balance, given the unconvincing and scarce nature of the evidence collected so far, we can not recommend economic empowerment programs as effective forms of giving. Even if such services do turn out to have a positive impact, it seems unlikely to represent the best use of donor money. Furthermore, given the large sums of charitable and commercial funding directed towards microfinance in recent years, it is unikely that there is a funding gap for those instances in which it would offer the greatest benefit; in fact some observers have suggested there could be a dangerous glut of funding for microcredit chasing less reliable borrowers.
Nonetheless, we would welcome more research in this area in order to be able to provide a firmer assessment.
- Banerjee, A. Duflo, E., Glennerster, R., & Kinnan, C. (2009) "The miracle of micro…nance? Evidence from a randomized evaluation" MIT Department of Economics and Abdul Lateef Jamal Poverty Action Lab (J-Pal) working paper
- Karlan, D. & Zinman, J. (2009) "Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila" Yale Economics Department, working paper 68
- Duvendack M, Palmer-Jones R, Copestake JG, Hooper L, Loke Y, Rao N (2011) "What is the evidence of the impact of microfinance on the well-being of poor people?" London: EPPI-Centre, Social Science Research Unit, Institute of Education, University of London, p.75.
- Dupas, P. & Robinson, J. (2009) "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya" NBER Working Papers 14693, National Bureau of Economic Research, Inc.
Last updated: in or before 2012