Microcredit Hype and Hope

Microcredit, the extension of small loans to poor people, is an attractive, but over-hyped idea. Thomas Dichter has written an excellent concise summary of the issues.

…microcredit is an almost perfect case of a phenomenon that has come to characterise much of development assistance – a widening gap between reality and propaganda. For while the promise of microcredit is irresistible – help the poor out of poverty using their own entrepreneurial energies, and in the process get our investment back – the hoped for poverty reduction impact of microcredit remains elusive. While much has been learned about managing microcredit in a sound manner, many newcomers to the field succumb to the temptation to trumpet success prematurely…

The little serious research we do have on microcredit’s impact shows that it helps poor people bridge cash flow gaps in their consumption cycle, and it can give more confidence to women…

And so we come again to familiar territory in the development industry. An idea that, after all, can produce some modest changes in the life of poor people (cash flow smoothing, confidence building, etc.) but that really works well only in some circumstances, is carried off by hype and urgency, offered as much more than it really is, and applied everywhere. As it grows it is inevitably caught up in the decades-old incentive structure of the development aid industry – people and institutions are rewarded for mobilising and moving money… our industry ignores complex and contextual approaches to development (institutional, legal, governance, and other reforms) in favour of superficial feel-good solutions that produce at best marginal changes, but satisfy the need to be perceived as ‘doing something for the poor.’

You can download the article here (pdf).

Update: There is now a shorter html version available here. The pdf version is better.

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