Microfinance: A New Way of Development?

This paper seeks to investigate why similar microfinance projects, with basically the same characteristics, worked in some countries and not in others.

The paper states that:

• The first examples of group lending, which appeared in the 19th century in Europe; contributed to the economic and social development of those areas;
• Analyzing the characteristics of those successful experiences can help in understanding modern failures and successes;
• Microfinance is more likely to succeed where a tradition of cooperation, association and social interaction is already established within the society.

The paper discusses:

• The conditions necessary for the development of a sound microfinance sector;
• The basic requirements that make microfinance an efficient way to provide credit;
• A game theoretical model to explain the functioning of the lending mechanism used by microfinance institutions (MFI)s and the conditions that ensure the success of the program;
• The role that social capital plays in the success of an MFI;
• The impact that a sound microfinance system can have on the social and political conditions of the groups involved.

The paper concludes by presenting the experience of Ecuador, a country rich in social capital, where microfinance has played a fundamental role in the economic and political development of the poorest regions.