Key message 4 – Broadening the use of microcredit beyond entrepreneurial activities could increase economic activity and borrower welfare
Microcredit has the potential to be used for a broader variety of purposes, such as supporting borrowers to migrate, find jobs, or smooth consumption during difficult seasons. There are likely many more ‘employees’ than entrepreneurs’ in the world – those who would prefer a job with a stable income over the risk of starting a business – and those who could use microcredit for smoothing consumption during bad days and months. Recent studies how that lending for such purposes could increase household welfare.
Microcredit for migration
In an IGC study in Bangladesh, Bryan et al. (2014) measured the impact of information, microcredit loans, and small cash grants on migration, food security, and income. Hunger during pre-harvest ‘lean’ seasons is widespread in the agrarian areas of Asia and Sub‑Saharan Africa. From 2008–2011, researchers randomly assigned incentives – about $8.50 in cash or credit to cover the cost of a round‑trip bus fare – to households in rural Bangladesh to encourage them to temporarily migrate to urban areas during the lean season. They hypothesised that enabling labour mobility would increase economic activity and incomes.
Researchers found that the loan and grant had a significant impact on migration during the 2009 lean season and remigration during the following two seasons (see Figure 1). This also led to increased food and non-food spending and calories consumed by migrants’ families.
The study reveals microcredit can overcome the barriers preventing poor rural households from taking advantage of seasonal migration. Notably, there is no effect in the group only given information, indicating the reluctance to migrate is not because the poor are misinformed about the profitability of migrating.
In the 2014 lean season, the same researchers conducted a second experiment that randomly assigned villages to one of two groups: a ‘lowintensity’ treatment in which 10% of the landless population were offered a loan, or a ‘high-intensity’ treatment where 50% of the landless population were offered the same loan. Again, offering the loan substantially increased seasonal migration (Figure 2) and income increased by an average of 19% during the lean season for households offered the loan in high-intensity villages. The increase in migration was higher in high-intensity villages, indicating some benefits of coordinated travel when many neighbours simultaneously receive job offers.
Microcredit for consumption smoothing with productive consequences
Fink et al. (2018) develop a model to show that seasonal cash constraints during lean seasons not only undermine households’ ability to smooth consumption over the cropping cycle, but also affect labour markets if cash‑constrained farmers sell family labour to meet short-run cash needs. They found providing access to subsidised microcredit during the lean season reduces aggregate labour supply, drives up wages, and reallocates labour from less to more cash-constrained farms – but also increases consumption.
Additionally, due to a credit crunch, small-scale farmers are commonly observed to ‘sell low and buy high’, rather than the reverse. In an experiment in Kenya, Burke et al. (2018) show that providing timely access to credit allows farmers to buy at lower prices and sell at higher prices, increasing farm revenues and generating a higher return on investment.
Microcredit can also be useful for smoothing consumption after natural shocks. In a recent experiment Lane (2018), microfinance clients were randomly pre-approved for loans made available in the event of local flooding. The study showed this unique type of microcredit improved household welfare through two channels: a ‘pre‑event’ insurance effect, where households increased investment in productive but risky production, and a ‘post-event’ effect, where households were better able to maintain consumption and asset levels.
Findings from these studies suggest large potential welfare gains from using microcredit for a broader variety of useful purposes beyond promoting entrepreneurship.
Figure 2: Migration from a loan in low-intensity and high-intensity villages
Challenges of scaling up
Based on the research findings, the migration support programme in Bangladesh was delivered and tested at scale for the first time in 2017 by the non-governmental organisation (NGO) Evidence Action. Performance monitoring revealed mixed results: programme operations expanded substantially, but there were some implementation challenges and programme take-up rates were lower than expected.
The evaluation found the programme did not have the desired impact on inducing migration and consequently did not increase income or consumption. The programme has since addressed implementation issues, namely delivery constraints and ineffective targeting, believed by the researchers to be the primary obstacles to impact. Data from monitoring the ongoing 2018 programme suggest these issues have been substantially resolved. The real test will be the results of the second evaluation emerging in 2019.