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CGD in the News

Challenges in Using Micro-Credit to Help Yemen's Poor (IRIN)

March 21, 2013

Senior Fellow David Roodman is quoted in an IRIN piece on the effectiveness of micro-credit.

From the article:

Afrah Ahmed, 23, an entrepreneur based in Yemen’s capital Sana’a, is no stranger to micro-credit: she is preparing to take out her third loan.

But when asked if previous borrowing had helped improve her life, she gave a lukewarm reply.

“Only to a certain extent, honestly, because life is very hard, there's no money in the house, no-one works. I am looking for a solution to improve life,” she told IRIN.

Whether micro-credit “works” for lifting people about of poverty is a question that has been debated not just in Yemen but around the world.

“I wouldn’t describe it as a great way to tackle poverty; it does modest good at a modest cost,” David Roodman, a senior fellow at the Center for Global Development in Washington, and the author of a recent book on micro-finance, Due Diligence.

“I think it’s something that enriches the economic fabric of a society and contributes to the process of economic transformation in a modest but useful way, which in a sense is what development is.”

Micro-finance includes financial services such as micro-credit (small loans) and micro-savings (making it easy to put small amounts of money aside).

Five randomized control studies carried out in Morocco, the Philippines, Mongolia, India and Bosnia-Herzegovina seem to show that micro-loans can improve business profitability, but do not seem to improve poverty indicators like household spending and the numbers of children in school.

With 15 years of experience and a legal framework in place, Yemen, the Middle East’s poorest nation, has been something of a regional pioneer in terms of micro-credit, and the broader micro-finance sector (which, as well as small loans, also includes products such as savings accounts for those usually excluded from mainstream banking).

Despite widespread unrest across the country over the last two years, the sector has expanded considerably, though it is still far from achieving its potential.

Adel Mansour, the author of a 2011 Social Fund for Development (SFD) report, says micro-finance institutions managed to reach 439,000 people between 1998 and the end of 2011 in a country of 25 million with a poverty rate exceeding 40 percent.

“We estimate [we need] a million client[s] for the micro-finance industry just for it to be what we aim it to be for helping the poor. With the current numbers we aren't really satisfied with where the industry is,” said Najah al-Mugahed, the executive director of the Yemen Micro-finance Network.

Read it here.