A Second Look at Microfinance The Sequence of Growth and Credit in Economic History

Microcredit—the extension of small loans
to very poor people—has grown rapidly in the
past decade, reaching tens of millions of individuals
around the world and providing billions
of dollars in loans. From the very
beginning of the microcredit movement, the
presumption has been that the poor lack
access to formal financial services, particularly
to nonusurious credit. In some of the
rhetoric of the movement, it has even been
presumed that the poor are deliberately
“excluded” from access to credit.

The response has been to democratize
credit, providing access to all. Such access, it
is thought, will enable the poor to work
themselves out of poverty by investing in
microbusinesses or asset acquisition, which
in turn will feed into economic growth. Pick
up almost any article on microfinance in the
last 15 years (or more recently any microfinance
website) and you will find assertions
that reinforce this notion:

The women I’ve met in Uganda and
Guatemala are so resourceful, and it’s
just amazing to see how, with their
courage and diligence, they create small
businesses with such tiny amounts of
money.

[T]he bank gave her a loan of . . . US$25.
Such a small sum to start a business
seems laughable, but this was no joke—
this was “microcredit,” designed for
would-be entrepreneurs in poor areas.
Microcredit programs have successfully
contributed to lifting people out of
poverty in many countries around the
world.