Is microfinance a good bet for a donor? We feel the answer is complicated, and that the many extreme exaggerations of microfinance’s impact get in the way of making an informed decision.

This post summarizes the differences between the stories you’ve probably heard and the reality according to available evidence.

Myth #1: the way microfinance charities help is by giving people loans to expand businesses. Success stories like Andrea’s, Lucas’s and Sophia’s are representative.

Reality: there isn’t much reliable information on how people are using loans, but the evidence there is suggests that “microloans” are often used for consumption purposes: food, visits to the doctor, etc. This isn’t a bad thing - the poorest people in the world face considerable financial uncertainty, and loans can empower them to manage their own lives.

So, however, can savings, which some scholars feel are more beneficial for the poor than loans. Funding institutions to help people save may not have the same sex appeal as “lending your money to help people grow their businesses,” but it might do more good.

For more, see:

• “Will the real microlending please stand up?” - a summary of this idea, 2 years old (more evidence has become available since)
• Portfolios of the Poor, a study on how extremely low-income people use financial services (formal and informal)
• Post on evidence of impact for microfinance - most encouraging effects came from programs not focused on business investment
• Conversation with David Roodman about microfinance

• More information on how loans are used

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