Can the Poor Afford Microcredit?

Topic :

The microfinance movement rests largely on one basic assertion: that poor households have high economic returns to capital.1 Even a small bit of extra cash, it is argued, can transform money-starved, micro-scale businesses. The challenge for microlenders has been to figure out how to provide banking services in an efficient, long-term way.

The assumption of high returns to capital in poor communities justifies the expectation that, if it can be delivered, microfinance will bring critical social and economic impacts. The assumption also undergirds arguments that poor households can pay high interest rates—rates that are high enough to allow microlenders to sustain themselves without donor help.An expectation of high returns to capital is thus at the heart of both the social and economic logic of microfinance. So it may be surprising that we in fact have very little direct evidence on the returns to capital of the poor. Indirect evidence, yes, but very little systematic, direct data on how access to capital translates into extra profits for “micro-entrepreneurs.”

This note describes what new research in Mexico, Sri Lanka, and Indonesia shows, identifies its limits, and describes what we need to know to resolve ongoing debates. Based on the evidence so far, the big debates are still far from being resolved. The evidence suggests that the poor are a diverse group. The question so far has been posed as whether or not the very poor can truly benefit from microcredit. A better question is: how many and to what degree?

  • Resource type
  • Author Jonathan Morduch
  • Year of Publication2008
  • Region
  • LanguageEnglish
  • Number of pages7 pp.

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