ChainWhat it assumes · how to break it
Start
A microfinance institution, following the model pioneered by Muhammad Yunus and the Grameen Bank in Bangladesh, offers small loans to poor rural women without collateral.
1
As a result, people excluded from banks because they lack collateral or a credit history can borrow to buy equipment or stock.
financial inclusion · access to credit
financial inclusion · access to credit
Assumes: Lack of credit is what stops the poor starting businesses.
But: Many poor households lack the skills, markets or infrastructure to run a profitable business even with a loan.
2
This means borrowers start or expand small businesses, such as raising livestock, sewing or running a stall, and earn more.
entrepreneurship · income
entrepreneurship · income
Best link to attack
Assumes: Loans are invested in businesses that earn more than the interest charged.
Assumes: Loans are invested in businesses that earn more than the interest charged.
But: Interest rates are high, and many loans are used for consumption or to repay other debts, which can lead to over-indebtedness.
3
Consequently, households spend more on food, school fees and health care, and women gain more say over household spending.
living standards · empowerment of women
living standards · empowerment of women
Assumes: Extra income is spent on the family's needs.
But: Repayment pressure can force households to cut spending on food or take children out of school.
4
Therefore, absolute poverty falls and health and education improve, raising development for the households involved.
absolute poverty · development
absolute poverty · development
Assumes: The gains are large enough to change living standards.
But: Loans are small, so even successful businesses may lift incomes only slightly.
End
Development improves for borrowers as incomes rise and more is spent on food, health and education.
Evaluation chain
- E1However, the gain in development depends on loans being invested in businesses that earn more than the interest charged.
- E2If the business is in a crowded local market, or the loan is used to pay for food or other debts, it does not generate enough income to cover repayments.
- E3As a result, borrowers can fall into a cycle of taking new loans to repay old ones, leaving them worse off.
- E4So microfinance raises living standards for some households but has a modest average effect, and can harm borrowers where interest rates are high and lending is poorly regulated.
Another way to attack it: Microfinance works at the level of individual households, so on its own it is unlikely to change national indicators such as HDI much without wider investment in infrastructure and education.
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Questions this answers
- Evaluate microfinance as a strategy for promoting development.
- Explain how access to microfinance could reduce poverty.
- Discuss whether microfinance is more effective than foreign aid at raising living standards.
Diagram
No standard diagram. Use household evidence such as income, school attendance and repayment rates; note that careful studies have found more modest average effects than early claims.
Reverse and related
Loss of access to microfinance → poor households fall back on informal moneylenders charging higher rates, or cannot invest at all.