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

Monday, March 2, 2015

WASHINGTON, Feb 27 (Thomson Reuters Foundation) – Microcredit is no panacea for lifting millions of people from poverty, leading economists said on Friday in releasing research from seven countries that challenges a key development tool.

For over 15 years, extending microloans to very poor people has been hailed as a path out of poverty, especially for women.

Microcredit, pioneered by Muhammad Yunus, founder of Grameen Bank in Bangladesh and winner of the 2006 Nobel peace prize, has been promoted by development agencies as a route to self improvement for very poor families considered too risky by traditional banks.

Microfinanciers make tiny loans to small-scale entrepreneurs, who usually belong to a borrowers’ club that guarantees repayment. The idea is a family will invest in its business, generate more income and break out of aid dependency.

The industry, which has expanded dramatically since 1997, had reached 137.5 million families by 2010, according to Microcredit Summit Campaign, a non-profit which brings together microfinance practitioners.

But economic studies spanning four continents and seven countries conducted between 2003 and 2012 found that microcredit fell well short of its promise, and there was no clear evidence it reduces poverty.