NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, March 23, 2016

Micro-financing “led to a higher level of debt among already impoverished communities” in the developing world, instead of kickstarting jobs, according to new study. After months of research in Bangladesh, Dr Laurel Jackson has warned that the practice of providing small loans to poor families is dramatically increasing stress and debt levels.

“The theory behind micro-financing poor nations is that it will encourage entrepreneurial skills, increase income generating activity and empower the poor. This will in turn increase access to health and education. However, our research tells a different story,” said Dr Jackson, from Western Sydney University’s School of Business in Australia.

Micro-financing dates back to the 1970s in Bangladesh, where small loans were given to poor people who did not have access to banks. The idea’s pioneer Professor Muhammad Yunus, was awarded the Nobel Peace Prize in 2006 and it has since spread around the world.

Lack of business skills

But although there are some entrepreneurs who have used micro-financing to their benefit, Dr Jackson said her research revealed that that the vast majority of third-world poor do not possess the skills and creative visions that are required for successful entrepreneurs.