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What Are Microloans Used For, Anyway?

Elizabeth Garcia's family is one of thousands of poor Venezuelans who received microcredit loans to start their own business. But do people who get microloans actually use them for what they say they do? GREGORIO MARRERO/AP hide caption

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GREGORIO MARRERO/AP

Microfinance is one of those trends that just seem to make sense. Poor people can't get loans. But they don't need very much money for a business. What if we do small loans, a few hundred dollars, so people can start business and raise themselves out of poverty. The whole thing has a great free market, feel good thing about it. People helping themselves. Heck, the Grameen Bank won the Nobel Peace Prize a few years back.

Well, it turns out says Barbara Kiviat on her Reuters blog, those loans aren't necessarily used the way the lenders think they are:

Thursday I was at this conference, where Dean Karlan of Yale talked about research he’s been doing with Jonathan Zinman of Dartmouth. In interviews with microfinance recipients in the Philippines, the pair discovered that some 46% of borrowers used a decent chunk of their business loan to pay down other debt and about 28% spent part of the money on a big household purchase—even though fewer than 4% of people in either category ever admitted this to their bank.

Microloans almost always get paid back, with interest, so it's obvious that they are valued by the people who take them. But they may not be using the loans for what lenders thought. There is a quite lively debate going on in the microfinance community that makes for some good reading. I found my way into it from Richard Rosenberg at CGAP. He wrote an interesting paper published earlier this year titled "Does Microcredit Really Help Poor People?" The answer, as far as I can tell, is we don't really know at this point.