Report Casts Doubt on Giving Small Loans to Poor Entrepreneurs

Monday, July 30, 2007

Global microfinance programs may not help reduce overall poverty in the developing world, new research shows.

Despite ongoing efforts by the United Nations, microfinance programs offering small loans to local entrepreneurs do little to reduce poverty in the developing world, a new report says.

In some cases, the programs may actually be making matters worse by encouraging borrowers to create subsistence enterprises that will never lift them out of poverty, according to Aneel Karnani, an associate professor of strategy at the University of Michigan’s Ross School of Business.

Rather than offering cheap start-up capital, governments and businesses seeking to fight global poverty should instead focus on job creation by “supporting larger enterprises in labor-intensive industries,” Karnani concludes in a report published in the Stanford Social Innovation Review.

Microfinance, which has gained support from Warren Buffett, Bill Gates, and other wealthy philanthropists, is aimed at helping residents in the world’s poorest nations establish their own businesses through innovative lending initiatives.

The strategy gained prominence last year when Muhammad Yunus, a Bangladeshi economist and banker who pioneered the global microfinance movement, was awarded the Nobel Peace Prize.

Grameen Bank, which Yunus founded in Dhaka, Bangladesh, in the mid 1970s, offers lines of credit as low as $9 for beggars to buy bread, candy, toys and other goods to sell on the street. It has also broken social taboos by offering small-business loans to women in Muslim countries to buy cell phones, sewing machines, and weaving materials.

Today, the bank provides loans to nearly 7 million people — 97 percent of whom are women — with some 2,226 local branches throughout the country. It claims a 98 percent repayment rate.

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Source: Inc (link opens in a new window)