Microfinance - new direction or lost in implementation?

Some argue that microfinance alleviates poverty and some claim that microfinance causes over-indebtedness among the poor and thus, it has become even more important to understand the effective of microfinance. This article talks about research findings from two randomized evaluations - one from rural areas of Morocco and the other from Kolkata, India (which is also a CMF study).

The study conducted in Morocco found that even though, microfinance banks increased people’s access to loans, it did not cause any “significant rise in the number of new businesses being set up”. The study found that the profits that clients made from their business were used to pay the interest on the loans.

Likewise, the study conducted in Kolkata found that clients who received a grace period before they begin repayment invested almost 10% more of their loan into their business, however, greater flexibility in repayment increased default. 

The article concludes by suggesting that MFIs could probably offer clients an option of taking a loan with flexible repayment schedule with higher interest rates or immediate repayment schedule with lower interest rates.