The Effects of For-Profit Microloans
In recent years, the effects of microcredit, particularly the high-interest loans offered by for-profit lenders, have been hotly debated. New research (abstract; PDF) from Dean Karlan and two co-authors, which Karlan discussed on this blog as the project was getting underway, addresses the impacts of the for-profit loans offered by Compartamos Banco, Mexico’s largest micro lender. Their findings:
Our results suggest modest but generally positive average effects on our sample of borrowers and prospective borrowers. We make five broad inferences. First, increasing access to microcredit increases borrowing and does not crowd-out other loans. Second, loans seem to be used for both investment—in particular for expanding previously existing businesses—and risk management (through a reduction in asset fire sales). Third, there is evidence of positive average impacts on business size, reliance on/need for aid, lack of depression, trust, and female decision making. Fourth, there is little evidence of negative average impacts: the only “negative” impacts are reductions in asset purchases and temptation goods, and these results have normatively positive or neutral interpretations as well. Fifth, the positive effects are not sweeping or transformative. Although some of the AIT effects are economically large, and all of the statistically significant effects are likely large in treatment-on-the-treated terms, we find statistically significant effects on only 12 of the 35 more-ultimate outcomes we evaluate, and no positive effects on household/business income, consumption, or wealth.
These results, taken together with a paper showing strong price elasticities of demand for Compartamos credit (Karlan and Zinman 2013), contribute to a strong business and policy case for lowering interest rates: profits do not decrease, and social impact presumably increases (slightly). One missing piece for this case is evidence on heterogeneous treatment effects. If average impacts mask dispersion where some (potential) borrowers are much better off and others worse off, this would have important implications for modeling and policy concerned with the effects of expanded access to credit on inequality. We are undertaking further research to identify the presence or absence of heterogeneous treatment effects from Compartamos credit and hope that others will pursue similar inquiries in other settings.