Is micro-credit really working?

Tim Harford has a very good piece in today’s FT and he says yes:

Karlan and Zinman wanted to know what value there might be in
expanding access to credit. ZaFinCo was no dewy-eyed social business,
but a hard-nosed, profit-minded company, charging 11.75 per cent per
month on a four-month loan, or 200 per cent APR, much more than
Compartamos was generally judged to have been charging.

the high rates, the results were astonishing. "We expected to see some
good effects and some bad," explained Karlan, who checked in with the
experiment’s participants six to 12 months after they had filed their
initial loan applications. "But we basically only saw good effects."

strikingly, those "treated" by the experiment – that is, those for whom
the computer requested a second chance at a loan – were much more
likely to have kept their jobs than the control group. They were also
much less likely to have dropped below the poverty line or to have gone
hungry. All these outcomes were recorded well after the loan had been
taken out and (usually) repaid, so this was not measuring a temporary
debt-funded binge.

This seems mysterious. How can a loan at 200
per cent APR help people to stay out of poverty? One answer is that
most people turned down for a 200 per cent APR loan would be able to
get one at 300, 500 or over 1,000 per cent from an informal
moneylender. More important is that these loans were not used to start
businesses but to help people keep jobs that they already had. If a
smart new blouse or a spare part for the family moped is what it takes
to stay in work, then who is to say that an expensive loan isn’t a wise


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