Mongolia’s economy grew 17.3 percent
last year thanks to a mining boom, and the government is set to distribute to
the public some $1 billion to share the wealth. So it’s easy to forget that,
Mongolia’s meteoric economy notwithstanding, 30 percent of the population is
impoverished.

Against this backdrop, the European
Bank of Reconstruction and Development (EBRD) launched a project in 40
Mongolian villages from 2008-2009 to assess the impact of business startup
microcredit lending. Does it reduce poverty? And which loan structure is best?

The second question is key because
the microfinance industry is in transition, shifting from the group loans
pioneered by Grameen Bank to individual lending. In a group loan, the borrowers
are liable for each other’s payments, meaning that everyone goes into default
if one member doesn’t repay. This, naturally, can be very problematic.

But there are scant data on the
relative impact of the two models regarding business creation, poverty
reduction, etc., the bank notes. So, in cooperation with Mongolia’s XacBank, it
offered group loans to women in 15 villages and individual loans to women in
another 15 villages. Ten villages formed the control group.

Some highlights from the findings, released last month:

• The results at least partially
  support the growing body of evidence that microfinance doesn’t make much
  of a dent in poverty, as incomes remained static in both loan groups. It
  might just be too early to observe significant change, the bank notes. But
  more and more research suggests that micro-finance is no poverty slayer,
  contrary to early optimism.

• As regards business creation
  and household well being (measured by food consumption), the group loans
  were more effective. Women in that program were 29 percent more likely
  than the control to operate a business. They also put more food, including
  fresh produce, on the table. For individual loan recipients, no impact was
  observed.

• Much of the lending didn’t go
  towards small business creation. In fact, half of the money went to consumer
  items. By survey’s end, the households in both loan programs were much
  more likely to own a VCR or radio than those in the control.

Conclusions? The bank posits that
group loans had more impact because borrowers in a collective are less prone to
risky investments or “paying it forward,” so to speak, by lending on to family
and friends. On poverty reduction, the EBRD notes that less-educated women in
both groups seemed to benefit more, which is promising because education is “a
proxy for long-term poverty.”

 Source: http://eastofcenter.tol.org