ChainWhat it assumes · how to break it
Start
Microfinance loans become available to poor households in rural villages and urban slums.
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 people who were unemployed or underemployed set up small businesses and become self-employed.
self-employment · underemployment
self-employment · underemployment
Assumes: Borrowers create new businesses rather than refinancing existing activity.
But: Many loans finance businesses that already existed or are spent on consumption, so few new jobs are created.
3
As a result, some businesses grow and take on family members or neighbours as workers.
micro-enterprise · job creation
micro-enterprise · job creation
Assumes: The businesses grow beyond the owner alone.
But: Most microenterprises stay very small and employ only the owner.
4
Therefore, total employment rises as more people do paid work, mainly in the informal sector.
employment · informal sector
employment · informal sector
Best link to attack
Assumes: The new businesses add to total output rather than taking customers from existing ones.
Assumes: The new businesses add to total output rather than taking customers from existing ones.
But: When many borrowers start the same kind of business, such as small shops, in a village with limited demand, they take customers from each other and existing traders lose income.
End
Employment rises, mostly as self-employment in small informal businesses.
Evaluation chain
- E1However, the rise in employment depends on new businesses finding customers without taking them from existing traders.
- E2When local incomes are low, demand for the goods and services sold by microenterprises is limited.
- E3As a result, new stalls and shops share the same small market, so the work available is spread more thinly rather than increased.
- E4So microfinance raises total employment by less than the number of loans suggests, and mainly turns underemployment into slightly fuller self-employment.
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Questions this answers
- Assess the impact of microfinance on employment in developing countries.
- Explain how access to microfinance could reduce underemployment.
- Discuss the limitations of microfinance as a strategy for creating jobs.
Diagram
No standard diagram. Use evidence on self-employment and the number of businesses started; local demand limits are key to evaluation.
Reverse and related
Loss of microfinance → small businesses cannot fund stock or equipment, so self-employment falls.