Impact on income, consumption and the creation of businesses

Tazul Islam suggests that microcredit has a “positive impact on enterprise and household income and asset accumulation, household consumption. However, the positive economic impacts associated with microcredit are not as extensive as once thought. A study by Dean Karlan of Yale University in the Philippines compared two groups in Manila: a treatment group, financed through microcredit, and a control group that did not receive microcredit. The study showed that in this case many microcredits were loaned to people with existing business, and not to those seeking to establish new businesses. The businesses became more profitable and laid off unproductive employees including friends and relatives that they previously had felt obliged to employ.

The first randomized evaluation of the impact of introducing microcredit in a new market has been undertaken in slums in Hyderabad, India, in 2008. Half the slums were randomly selected for opening branches of banks that provided microcredits while the remainder were not. The study showed that fifteen to 18 months after lending began, there was no effect on average monthly expenditure per capita, but expenditure on durable goods increased and the number of new businesses increased by one third.