ChainWhat it assumes · how to break it
Start
Microfinance lenders expand into rural areas, offering small loans to poor households, especially women, who cannot borrow from banks.
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
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
As a result, incomes at the bottom of the distribution rise relative to those of richer households, who already had access to banks.
income distribution
income distribution
Best link to attack
Assumes: The poorest are the ones who borrow and benefit.
Assumes: The poorest are the ones who borrow and benefit.
But: Lenders prefer borrowers who are likely to repay, so the very poorest are often excluded or choose not to borrow.
4
In addition, lending mainly to women gives them their own income and assets, narrowing the gap between men's and women's incomes.
gender inequality
gender inequality
Assumes: Women keep control of the loan and the income it earns.
But: In some households male relatives take control of the loan or the business.
5
Therefore, income inequality narrows, so the Lorenz curve moves towards the line of equality and the Gini coefficient falls.
Lorenz curve · Gini coefficient
Lorenz curve · Gini coefficient
Assumes: The gains are large enough to change the national distribution.
But: Loans are small, so the effect on a national Gini coefficient is likely to be very slight.
End
Inequality narrows as poor households and women gain income from small businesses.
Evaluation chain
- E1However, the effect on inequality depends on whether the poorest households are the ones who borrow.
- E2Because lenders need loans to be repaid, they tend to lend to households that already have some income, skills or assets.
- E3As a result, the moderately poor gain while the very poorest are left out, so the gap at the bottom of the distribution may widen.
- E4So microfinance may narrow inequality between the poor and the rich only slightly, and can leave the poorest further behind.
Another way to attack it: High interest rates transfer income from poor borrowers to lenders, and borrowers whose businesses fail can end up further behind.
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Questions this answers
- Assess the effectiveness of microfinance in reducing inequality in developing countries.
- Discuss whether microfinance helps the poorest households.
- Explain how microfinance could reduce gender inequality.
Diagram
Lorenz curve moving towards the line of equality, with the Gini coefficient falling.
Reverse and related
Withdrawal of microfinance → poor households lose access to credit and the income gap with richer households widens.