Does microfinance reduce poverty? What the evidence says
In the 1990s and 2000s microcredit was often presented as a powerful tool against poverty. From the late 2000s, randomised controlled trials (RCTs) tested that claim directly.
The 2015 evidence
In 2015 the American Economic Journal: Applied Economics published six randomised evaluations of microcredit in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia and Morocco. The editors’ summary (Banerjee, Karlan and Zinman) concluded that microcredit had “modestly positive, but not transformative” effects:
- Take-up was lower than expected; many eligible households did not borrow.
- Business activity rose for some borrowers, and some invested more in their businesses.
- No consistent average increase in household income or consumption.
- No strong evidence of harm, such as widespread over-indebtedness, on average.
- Effects on women’s empowerment and children’s schooling were limited.
Heterogeneity matters
Averages hide variation. Later analysis found that households that already ran businesses often benefited substantially, while others used credit mainly to smooth consumption or buy durables. That is still valuable, but it is not a route out of poverty on its own.
Other financial services
The evidence is often more positive for:
- Savings, especially commitment and labelled accounts;
- Mobile money, with lower costs and better risk-sharing (see digital finance);
- Graduation programmes, which combine an asset transfer, training, consumption support and savings. A six-country study published in Science in 2015 found lasting gains in income and consumption for ultra-poor households.
What this means
- Microcredit is useful financial infrastructure, not a cure-all.
- Value comes from choice and flexibility: better tools to manage irregular income and shocks.
- Product design matters. Grace periods and flexible repayment can change outcomes; one study in India found a grace period led to more business investment.
- The poorest may need non-credit support first.
Further reading
- Banerjee, Karlan and Zinman (2015), “Six Randomized Evaluations of Microcredit: Introduction and Further Steps”, AEJ: Applied.
- Collins, Morduch, Rutherford and Ruthven (2009), Portfolios of the Poor.
- CGAP publications on financial inclusion evidence.