In Japan, there are lots of loan sharks; some charge borrowers more than 50% interest annually. I feel that borrowing money from these institutes is risky, but many people still desperately need money from the loan sharks. I’ve heard a lot of sad stories about borrowers with high interest rates who could not pay the money back and committed suicide. However, microcredit, or small loans given to poor women to invest into generating their own incomes, would be a panacea to help poor women in the world embark on a new business venture. In addition, microfinancing presents opportunities, such as extending education and small businesses. Families receiving microfinancing are less likely to pull their children out of school for economic reasons and they are more likely to open small businesses that will create new jobs. In 2006, Muhammad Yunus and Grameen Bank who were the founder of Microcredit were awarded the Nobel Peace Prize.
However, a randomized control study of micro lenders in India conducted by the Massachusetts Institute of Technology found access to microcredit had no impact on three poverty indicators: women’s empowerment, expenditure on child’s health and education. Alok Prasad, the CEO of India’s microfinance association, admitted that he didn’t know what proportion of India’s micro borrowers had benefitted from loans. The reason microcredit has not been the poverty killer is because poor people’s way of investing in businesses is wrong. If the poor were entrepreneurial, they would have come out of poverty by now.
Economic studies also revealed that increasing access to microloans is not an effective strategy for helping more women start businesses that allow them to get out of poverty. Microfinancing groups have promoted the idea that there are all sorts of entrepreneurial opportunities for impoverished women who could take advantage of if only they had the cash. However, according to news reports, poor people were selling off their meager assets to repay loans. Dean Karlan, a professor of economics at Yale University explained that all those rosy stories were essentially meaningless. Microfinance cannot be a panacea for poor people looking for a way to get a leg up out of poverty.