Hayat Kheir Imriri took out a microloan of $800 to buy stock for her store in a refugee camp for Palestinians in Beirut, Lebanon. Sam Tarling/Corbis via Getty Images hide caption

Hayat Kheir Imriri took out a microloan of $800 to buy stock for her store in a refugee camp for Palestinians in Beirut, Lebanon.

“I would like to know more about microloans, and if they are in fact helping women start businesses in the developing world.”

Goats and Soda asked our audience: What do you want us to investigate about girls in the developing world? Readers submitted more than 100 questions, then voted for https://paydayloan4less.com/payday-loans-il/ their favorite. We answer the top question in this article. To take part in our next callout, on global diseases, post your question here.

You’ve probably heard the stories. A desperately poor woman in a poor country gets a tiny loan – a couple hundred dollars. It’s the break she’s always needed. With that money she can finally buy the materials to start a small business. She turns a profit. Her income rises. Now she has money to expand her business even further, buy her kids more nutritious food, pay their school fees. Over time, she lifts her whole family out of poverty.

It’s certainly possible that plenty of women have successfully used microloans for a small business purpose. But based on the economic studies that have been done to date, it doesn’t appear that increasing access to microloans is an effective strategy for helping more women start businesses that will allow them to vault themselves out of poverty, at least not on a large enough scale to be detected.

The Backstory

Until about 40 years ago, the world’s poorest had virtually no access to credit from large-scale lenders. These types of lenders relied on traditional methods to determine if a customer could be trusted to repay a loan. And poor people were unlikely to meet those criteria. They often didn’t own enough property or other forms of collateral to secure a loan. And they didn’t have the kind of formal credit history, steady source of income or educational qualifications that could reassure banks in the absence of collateral.

Moreover, even if a bank were inclined to make a loan to an ultra-poor person, the small size of the loan could mean the bank’s earnings would easily be dwarfed by the administrative costs. So the world’s poorest generally had to rely on loans from friends and family members, or, if available, from small-time neighborhood money-lenders who charge exorbitant interest rates.

Then came the microfinance pioneers of the 1970s. Probably the most famous is Muhammad Yunus, an economics professor in Bangladesh who ultimately went on to found the Grameen Bank. But around the time Yunus was running his first pilot programs by lending his own money to women in Bangladesh, others were tinkering with similar approaches in, for instance, Central and South America.

The Big Idea

The models vary, but there’s a common thread: the use of creative methods to reduce the cost of processing the loan and the risk of default. For instance, many lenders figured that by lending to a small group instead of individuals, they’d not only spread the risk but rely on social pressure from group members to ensure each borrower pays back their share. Other techniques include requiring repayment in frequent installments – for instance once a week – over a very short period, with delivery in person to the loan officer.

As David Roodman details in his excellent book analyzing the case for microfinance – Due Diligence: An Impertinent Inquiry Into Microfinance – early on many microlenders also made a decision to focus and often even limit their services to women. This was partly due to the spread of feminism in the 1970s and ’80s and the growing attention it brought to the particular difficulties poor women face in getting economic opportunities. According to Roodman, the emphasis on women also seemed to reflect a widespread view that women would be less likely to default – at least in part because, for better or worse, women would be more susceptible to group pressures to repay.