Can microcredit be profitable?

A new study by Burke, Bergquist, and Miguel suggests that it can. Not only that: it delivers positive spillovers. I write about it over at Let’s Talk Development.

Microcredit that helps more than just the borrower

Prices in African agricultural markets fluctuate a lot: “Grain prices in major markets regularly” rise “by 25-40% between the harvest and lean seasons, and often more than 50% in more isolated markets.” To an economist, this looks like a massive missed opportunity: Why don’t farmers just hold onto their harvested grain and sell at a much higher price during the lean season?

According to new work by researchers Burke, Bergquist, and Miguel, farmers in Kenya lack access to credit or savings opportunities, and so they “report selling their grain at low post-harvest prices to meet urgent cash needs (e.g., to pay school fees). To meet consumption needs later in the year, many then end up buying back grain from the market a few months after selling it.” It’s like the grain market is a very expensive source of short-term loans.

Can microcredit help? Offering farmers a loan at harvest led them to sell less at harvest time and to sell more grain later, when prices were higher. “The loan produces a return on investment of 28% over a roughly nine month period.”

Read more…

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