Can micro-credit bring development?

Abstract

We examine the long-run effects of micro-credit on development in an occupational choice model similar to Banerjee and Newman (JPE, 1993). Micro-credit is modeled as a pure improvement in the credit market that opens up self-employment options to some agents who otherwise could only work for wages or subsist. Micro-credit can either raise or lower long-run GDP, since it can lower use of both subsistence and full-scale industrial technologies. It typically lowers long-run inequality and poverty, by making subsistence payoffs less widespread. Thus, an equity-efficiency tradeoff may be involved in the promotion of micro-credit. However, in a worst case scenario, micro-credit has purely negative long-run effects. The key to micro-credit's long-run effects is found to be the "graduation rate", defined as the rate at which the self-employed build up enough wealth to start full-scale firms. We distinguish between two avenues for graduation: "winner" graduation (of those who earn above-average returns in selfemployment) and "saver" graduation (due to gradual accumulation of average returns in self-employment). Long-run development is not attainable via micro-credit if "winner" graduation is the sole avenue for graduation. In contrast, if the saving rate and selfemployment returns of the average micro-borrower are jointly high enough, then micro-credit can bring an economy from stagnation to full development through "saver" graduation. Thus the lasting effects of micro-credit may partially depend on simultaneous facilitation of micro-saving. Eventual graduation of the average borrower, rather than indefinite retention, should be the goal of micro-banks if micro-credit is to be a stepping stone to broad-based development rather than at best an anti-poverty tool.

Group lending without joint liability

“…Groups play a role that depends on meeting costs and time use introduced in the next two sections. 6 Other than the above mentioned papers, our paper is also broadly related to the theoretical literature in microfinance that has emerged in the light of the Grameen Bank of Bangladesh abandoning explicit joint liability and switching to the Grameen II model, focusing on aspects other than joint liability, such as sequential lending (e.g., Chowdhury, 2005), frequent repayment (Jain and Mansuri, 2003;Fischer and Ghatak, 2010), exploring more general mechanisms than joint liability (e.g., La↵ont and Rey, 2003), and exploring market and general equilibrium (Ahlin and Jiang, 2008;McIntosh and Wydick, 2005;de Quidt et al, 2013).…”

Microfinance and Inequality

“…As such, microfinance enables the poor to increase their income, consumption, and productivity, which contributes to lowering inequality. Ahlin and Jiang (2008) describe a model in which the adoption of microfinance is considered financial development and show that microfinance decreases inequality.…”

The Role of Farmers and Informal Institutions in Microcredit Programs in Tigray, Northern Ethiopia

“…Literature research has revealed that the wider consequences of microcredit on society are poorly studied and understood (Develtere and Huybrechts 2005;Perry 2002). Research on the longer-term effects of microcredit is in its infancy (Ahlin and Jiang 2008;Khandker 2005;Moll 2005). Perry (2002:32) summarizes that "'impact' studies reign over 'institutional' studies that examine broader social and economic changes".…”