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.

steve cebalt

Their abstract (below in its entirety) seems more succinct:

Theory and evidence have raised concerns that microcredit does more harm than good, particularly when offered at high interest rates. We use a clustered randomized trial, and household surveys of eligible borrowers and their businesses, to estimate impacts from an expansion of group lending at 110% APR by the largest microlender in Mexico. Average effects on a rich set of outcomes measured 18-34 months postexpansion suggest no transformative impacts.


I do confess that never have known about "banco compartamos",at least at the community I live in.( tecamac,municipality os State of mexico,20 miles from mexico city).

At informal gossiping,I listen that preferred "microfinanciera", with heavy advertising to poor families,is banco azteca.
( banco azteca, is part of grupo salinas,who also owns second TV broadcaster , teveazteca )

And banco azteca is associate ,or partner of western union,..then,money sent by mexican inmigrants to his families throught western union-banco azteca,.is cashed at favorable conditions at the place where inmediately are offered costly cell phones,flat tv sets, and other merchandise,.all at "pagos chiquitos",.( small weekly payments)...that finally could be at shark loan interest rates of more than 70 % a year.
( or more,if the patron doesnt cover on time the pago chiquito.)

Other institutions,in order to help the poorest citizens, take the "banco azteca rates",.and charge aproximately the same.

there are not credits without underwritting.
Even very advertised "family loans",that in a small group of six aspiring enterpreneurs,lend tipically 300 thou dollars each of participants , for starting small business,requiere that somebody of the group,signs papers offering as collateral "escrituras" covering his house.-escrituras would be official property owning papers-.

if somebody doesnt have a property or a regular income job,it is required that a comadre,compadre,neighbor,or relative,who owns property,..signs papers ,and accepts to be charged in case the amigo doesnt pay the loan.



I do explain that those high interest rates are justified by Official Government sponsored Condusef, ( an institution supposedly dedicated to investigate abuses by Finantial institutionss to individual customers),,saying that :
" a high interest rate in an individual loan,is requiered to cover defaulted and never recovered lent money"

statement Im ok with , ,.but more than 70 % interest,in a country with normal inflation of 3-4 % ?