Paper

Is Microcredit the Answer to Poverty Eradication?

The need for a new definition of microcredit
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This paper explores the limitations of microcredit and suggests recommendations to make microcredit work.It lists the following five fatal assumptions about microcredit:

  • The poor all wish to be self-employed;
  • Credit is the main financial service needed by the poor;
  • Credit can automatically translate into successful micro-enterprises;
  • Those slightly above the poverty line do not need microcredit and giving it to them amounts to mis-targeting;
  • Microcredit institutions can all become self-sustaining.

The paper identifies the following risks of pushing forward microcredit as the strategy for poverty eradication:

  • When microcredit reaches only the poorest, they sometimes end up with lower incomes than before the micro-loan;
  • Other efforts at poverty eradication, such as investment in human capital through primary health and primary education programs, might reduce.

The paper makes the following recommendations to make microcredit work:

  • Studies should be undertaken to understand the impact of microcredit;
  • Implicit subsidies to microcredit institutions should be made explicit;
  • Microcredit programs need to target not just the poorest, but the poor and some non-poor micro- or meso-entrepreneurs;
  • Microcredit needs to be unshackled from minimalist credit for self-employment for the poorest and converted into financial services and technical assistance for agro- and non-farm enterprises for generating large amounts of wage employment for the poor.

About this Publication

By Mahajan, V.
Published