The idea has a wonderfully simple and powerful appeal: Give a tiny loan to a poor person in a poor nation. Watch her start a small business — whether hawking tomatoes or fattening goats — that puts her and her family on the first rung of a ladder that will elevate them out of poverty and into the middle class. Repeat across the planet.
Few proposals for economic development have been so durable and so celebrated as microcredit — the provision of business loans as small as $100 to the poor. Its appeal has spanned the political spectrum, drawing in the left with its subversive promise to empower women in sexist societies and enticing the right with its emphasis on entrepreneurship and individual responsibility. The World Bank and other lending agencies have bought into it, as have foundations and countless individual donors. In 2006, microcredit became the only economic development idea to win a Nobel Peace Prize, when the laurel went to Muhammad Yunus and Grameen Bank, the financial institution for the poor that he founded in Bangladesh.
There has been enough time and evidence now to explore the full impact of microcredit in depth, and, set against its vaunted reputation, my verdict is dour: Microcredit rarely transforms lives. Some people do better after getting a small business loan, while some do worse — but very few climb into the middle class. It’s a constructive endeavor, but it has been vastly overhyped. And the hype has undermined the good that the movement can achieve.
One reason microcredit has soared so high in public esteem is the power of the stories its promoters tell. In his memoir, Yunus tells of Murshida, a Bangladeshi woman whose husband regularly beat her. One day after he sold the roof of their hut to pay gambling debts, a storm soaked Murshida and her three children. When her husband came home, Murshida confronted him. He divorced her on the spot and threw her and the children out of the house. Murshida moved in with her brother and in time took her first microloan — $30 to buy a goat and sell the milk. With larger credits, she started a business sewing and selling scarves. Eventually she employed 25 women.
Such anecdotes are powerful. But that does not make them representative. Poor people who take loans use them in different ways and with different outcomes. By luck or by pluck, some do well, and it is their stories, of course, that microcredit promoters have most often recounted.
To be fair, microcredit has had more than selective storytelling on its side. Dozens of academic studies in the 1980s and 1990s seemed to validate the anecdotal evidence. Researchers typically surveyed hundreds of families and looked for patterns in the data. Perhaps families that had used microcredit also reported higher earnings, for example. The premier analysis was funded by the World Bank and appeared in the prestigious Journal of Political Economy in 1998; through complex statistical methods, it found that microcredit cut poverty in Bangladesh, especially when women received the loans. One of the researchers later estimated that 5 percent of Grameen Bank borrowers climbed out of poverty each year.