Microfinance loans, which took off in the decades between 1980 and now have had a different effect than originally expected, but this does not mean failure. To the contrary, research into the effects of microcredit show that these loans opened up a previously unknown financial world to the poor. Though they were not a savior from poverty, they are tool in the fight against it.
For a period of time from the 1980s to the early 2000s, “microloans” were all the rage in international development. The idea was simple enough:
By giving a very small loan to someone living in a poor country, you could help them expand a small business, which would lift their family out of poverty. When they pay back the loan, the money can be cycled to more borrowers, getting more families out of poverty.
Organizations offering microcredit to poor borrowers – many living on $2 or less per day – took off in those decades. Investors and donors poured money into microcredit, hundreds of organizations offered loans, and the number of borrowers worldwide skyrocketed to 211 million by 2013.
The microcredit movement has been undeniably successful in opening up financial services to poor people across many countries. But what has its track record been when it comes to lifting people out of poverty?
Over the past decade, this question has occupied researchers, who have conducted randomized studies across a variety of countries and settings. The findings have not supported the original hope for microcredit: They can’t find evidence that the loans have been lifting families out of poverty on average. Many concluded that the classic conception of microcredit was based much more on anecdotes than on robust evidence. Those results have in turn cooled the development community’s enthusiasm for microcredit.
But does this mean that microcredit has been a failure? Hardly.