Microcredit - What's it good for?

I just came across an interesting post by Ryan Hahn on the World Bank's Private Sector Development blog, on results from a recently completed CMF-JPAL study written by Abhijit Banerjee, Esther Duflo and others on the impact of microcredit.  The results from the study, which tested the effects of introducing microcredit (specifically from Spandana, a large MFI based in Hyderabad) into a new cluster of slums in Hyderabad, demonstrated that microcredit increased spending on businesses, and improved business outcomes by a statistically significant amount.  As the authors detailed in their conclusion . . .

These findings suggest that microcredit does have important effects on business outcomes and the composition of household expenditure. Moreover, these effects differ for different households, in a way consistent with the fact that a household wishing to start a new business must pay a fixed cost to do so. Existing business owners appear to use microcredit to expand their businesses: durables spending (i.e. investment) and business profits increase. Among households who did not own a business when the program began, those households with low predicted propensity to start a business do not increase durables spending, but do increase nondurable (e.g. food) consumption, consistent with using microcredit to pay down more expensive debt or borrow against future income. Those households with high predicted propensity to start a business, on the other hand, reduce nondurable spending, and in particular appear to cut back on “temptation goods”, such as alcohol, tobacco, lottery tickets and snacks eaten outside the home, presumably in order to finance an even bigger initial investment than could be paid for with just the loan.

At the same time, the effect of the introduction of Spandana microcredit's on non-financial aspects of development, specifically health, education and women empowerment, were statistically negligible.  The time-span was short, about 18 months, and effects in these areas may have a time lag.  Still, many may think these findings, or the lack thereof, are alarming.  Isn't microfinance supposed to help break through many development barriers, including health and education (check out the comments on the World Bank microcredit entry for examples)?

Maybe not.  Maybe having such high expectations for microfinance and microcredit (which is what microfinance basically is today in India, plus some insurance) is unfair.  If borrowers use relatively less expensive credit that comes from MFIs to pay down other higher interest loans (e.g.,  moneylender loans), invest in their businesses and increase their profits, then isn't microcredit serving its purpose?  Can we expect microcredit to affect education and health outcomes when school and health systems likely remain unimproved for these populations?

Financing is one small part of improving livelihoods, and it's important for practitioners and policymakers to keep that in mind.