A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History
Microfinance—the provision of financial servicessuch as small loans to the world’s poor—hasgrown in the past decade, extending billions ofdollars in credit to tens of millions of people. A major aimof the microfinance movement is to provide funds forinvestment in microbusinesses, thus lifting people out ofpoverty and promoting economic growth.
Recent experience and the economic history of richcountries, however, suggest that those expectations areunrealistic. Most people, poor or otherwise, are not entrepreneurs,so there is little reason to think that mass creditwould in general lead to viable business start‐ups. Today asin the past, business start‐ups in the advanced countriesdepend predominantly on savings and informal sources ofcredit; past forms of microcredit never played a role in smallbusiness development, and much microcredit is actuallyused for consumption rather than investment. In the historyof today’s rich countries, moreover, economic growthoccurred first, then came credit for the masses. That creditwas and is predominantly for consumption rather thaninvestment.
There is no reason to believe that the nature andsequence of growth and mass credit are fundamentally differentfor poor countries today than they were in the past.We should not expect microfinance to noticeably affectgrowth or successful business development.
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