Yes, microlending reduces extreme poverty

A modest increase in micro-lending to countries in need could help lift up to 10.5 million people from extreme poverty. This is the conclusion of my research, which was published last month in The B.E. Journal of Macroeconomics, which discovered that microfinance not only decreases the number of households in poverty, but also how poor they are.

Presently, 836 million people, which is 12% of the global population, are living in extreme poverty and are living on less than US$1.25 every day. Utilizing data from 106 emerging countries the years 1998 to 2013, I analyze the effectiveness of microlending as an effective poverty reduction instrument, I found that even a 10 percent increase in the total microfinance portfolio per customer could reduce this amount by 1.26 percent.

Muhammad Yunus with his Nobel Prize. Scanpix/Reuters

As early as the 70s Yunus began offering credit to women who were poor in the town in Jobra, Bangladesh, so that they could begin projects that generate income to help them and their families. In 2006, the experiments earned Yunus, as well as his microcredit focused Grameen Bank, a Nobel Peace Prize.

Since then, a variety that offer microlending have been implemented across a variety of nations across the globe, all the way from India all the way to the United States. According to a report from 2015 by advocacy organization Microcredit Summit Campaign In 2013, 3,098 microfinance institutions had served more than 211 million customers worldwide and just under half who were in poverty.

In 2017, the market for microfinance-related investments in small, medium, and micro businesses, as well as the supply of financial services to these enterprises, are expected to expand by approximately 10 percent to 15 percent. Further growth is predicted for India along with in the Asia-Pacific region.

Access to credit allows low-income people to start their own businesses, earning more money and enhancing their living conditions. A lot of lenders pair their smaller loans, financial products and services by providing peer-to-peer assistance, networking opportunities, and even health insurance to increase their customers prospects of creating an effective small-scale business.

As a result, a lot of economists suggest their findings that microfinance has the possibility of reducing the level of poverty.

Shobha Vakade, pictured here in 2010, utilised her US$400 loan to launch her own business. She fashioned strings of beads into necklaces from her home in the Mumbai slum. Danish Siddiqui/Reuters

The evidence for how well microfinance performs its function is not clear. Studies that have examined its impact on rural Pakistan and cities Kenya and Uganda and other developing countries, have established as well as disproved the idea behind Mohammud Yunus’s invention.

Evidence from all over the globe

My research was designed to make sense of this unconclusive evidence by using an approach to macroeconomics that ties data from a variety of countries to give a more clear picture.

Officially poverty is measured by 2 World Bank indicators: the poverty headcount ratio (which determines the percentage of people living less than US$1.25 per day threshold) as well as the poverty gap (which measures how low below the poverty line people are at a typical rate, and is expressed in terms of percentage).

Eritrean microfinance loan lenders join their money. Ed Harris/Reuters

The most important variable in my analysis is the participation in microfinance programmes. I have defined it in two distinct ways, for every of the countries studied The proportion in total customers as a percentage of the national population and the average size of loans (gross loan portfolio versus the total number of clients) by using microfinance information from MIX Market (the Microcredit Summit Campaign and MIX Market) A microfinance auditing business.

What I observed was a negative correlation between participation in microfinance and poverty. This means that the more people living in a particular country took advantage of small loans, the lower the level of in terms of poverty, it was recorded. In a typical developing country, one could increase the total loan portfolio per client by only 10% can reduce the rate of extreme poverty to 0.0126 percent.