A Second Look at Microfinance The Sequence of Growth and Credit in Economic History

Microcredit—the extension of small loans to very poor people—has grown rapidly in the past decade, reaching tens of millions of individuals around the world and providing billions of dollars in loans. From the very beginning of the microcredit movement, the presumption has been that the poor lack access to formal financial services, particularly to nonusurious credit. In some of the rhetoric of the movement, it has even been presumed that the poor are deliberately “excluded” from access to credit.

The response has been to democratize credit, providing access to all. Such access, it is thought, will enable the poor to work themselves out of poverty by investing in microbusinesses or asset acquisition, which in turn will feed into economic growth. Pick up almost any article on microfinance in the last 15 years (or more recently any microfinance website) and you will find assertions that reinforce this notion:

The women I’ve met in Uganda and Guatemala are so resourceful, and it’s just amazing to see how, with their courage and diligence, they create small businesses with such tiny amounts of money.

[T]he bank gave her a loan of . . . US$25. Such a small sum to start a business seems laughable, but this was no joke— this was “microcredit,” designed for would-be entrepreneurs in poor areas. Microcredit programs have successfully contributed to lifting people out of poverty in many countries around the world.