Microcredit isn’t dead

Wednesday, December 14, 2016

It may be one of the most tragic stories in economics: the rise and fall of microcredit.

The concept — reducing poverty in impoverished countries by giving very small loans to people without collateral — was once the most promising innovation in development economics. But after its inception in the early 1980s and its subsequent explosion in the following decades, one thing was missing: results.

Today, microcredit is an intellectually deflated balloon. Years after the concept was introduced to poor communities in more than 75 countries, the data is mixed at best on whether it actually worked. Many of the people in Bangladesh, where the concept originated in the mid-1970s under the hands of Nobel laureate Muhammad Yunus, still face extreme poverty. The death knell might have been the Indian state of Andhra Pradesh, where a booming microfinance market turned to crisis in 2011 as borrowers began to stop paying off their loans in protest of high interest rates.

But that doesn’t mean microcredit is dead — or even discredited. The problem is that microcredit was saddled with unreasonably high expectations, and we lost a sense of its more modest potential.

Source: Washington Post (link opens in a new window)

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