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

Wednesday, February 18, 2015

What has microfinance achieved for the world’s poor?

Estimates vary widely, but 300 million people are estimated to be direct beneficiaries of the microcredit movement, and more than $68 billion may be currently invested in the industry, according to a 2010 estimate from the Consultative Group to Assist the Poor, a unit of theWorld Bank.

From one perspective, microfinance is the model that makes the case for impact investing: billions in capital mobilized from private investors to scale up delivery of beneficial products and services that reach hundreds of millions of poor people around the world. But having scaled successfully, questions arise: What has all this money bought for so many people? Has the incidence of poverty measurably declined? Can it be said that these hundreds of millions of individuals and their families have lifted themselves out of poverty on the basis of the microloans they have received?

Sadly, the answer to these questions is no. Without doubt, microcredit has helped millions of families through times of trouble or tragedy and has enabled many microbusinesses to boost their owners’ income. It also seems likely that a modest number of poor families have vaulted themselves into the middle class through shrewd and successful entrepreneurial ventures aided by microloans. However, the overwhelming majority of businesses financed with microcredit have had only marginal impact on their borrowers’ income — and, according to the best estimates available, most microloans extended through the industry have been to finance consumption, not business ventures.

Microcredit offers a valuable service to poor people whose incomes fluctuate and who face unexpected financial needs and crises, but it’s only a way of reducing some of the stress of poverty, not of eliminating it.

The signature success of the microfinance industry has been its ability to marshal billions of dollars in capital, much of it from mainstream capital markets, to address the challenge of poverty. This is a huge achievement. Never before has so much capital been directly targeted at the bottom of the pyramid, relying significantly on market mechanisms rather than governments. But why haven’t microfinance institutions had impact on the poor that’s commensurate with the capital invested?

We believe there is a simple and straightforward answer to this question. However, its origins lie in the evolution of the microfinance industry.