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The Promise of Microfinance for Poverty Relief in the Developing World
(Released May 2007)

  by Matthew Ruben  


Key Citations





The accepted human rights are food, shelter, health and education, and the basic responsibility of a society is to make sure that an environment exists so that people can have these things. Employment is also a right, but society can't assure wage-based work for everybody, so the alternative is self-employment. The big financial institutions currently ignore almost two-thirds of the world's population. So I say the right to credit should have the topmost priority on the list of human rights.

- Muhammad Yunus, founder of the Grameen Bank (Yunus 2006)

The movement to expand financial services for the poor as a grassroots development strategy is a relatively recent phenomenon. Microfinance, which emphasizes granting small loans to the poorest of the poor without requiring collateral, rests upon the notion that the most impoverished people in developing countries typically don't otherwise have access to traditional financial services, but that they do possess modest survival skills that make them credit-worthy. Credit programs can offer the poor access to small amounts of capital (and often other low-cost financial services), and, in turn, they use these loans for self-employment projects, to generate income and eventually become self-reliant.

women dancing
Governor General of Canada Michaelle Jean dances with a group of women during the inauguration ceremony of the Consolidated Credit Union of Magnambougou

Though the model was rare and considered revolutionary in the 1970s, when there were only a handful of fledgling enterprises in Asia and Latin America, the popularity and acceptance of microfinance has become manifest in the vast numbers of microfinance institutions - recently estimated at more than 7000 by the World Bank - serving more than 20 million poor people in developing countries. In fact, the true numbers are difficult to estimate, because institutions are community-based, informal, and in many countries relatively unregulated. But where there were virtually none 35 years ago, there are undeniably many today. This acceptance has culminated in the awarding of the 2006 Nobel Peace Prize to Muhammad Yunus and the Grameen Bank of Bangladesh, early pioneers in the movement. And the United Nations declared 2005 the International Year of Microcredit. Microfinance is, by any reasonable measure, in vogue.

Why the sudden popularity? For one thing, most microfinance models don't require massive amounts of donor aid beyond startup costs. By design, microfinance institutions are self-sufficient in principle (if not in practice), relying on loan repayment rates that are high enough to be sustainable. And the programs generally don't require government assistance (outside of regulatory compliance), meaning that market forces should be able to keep microfinance programs afloat. Furthermore, the economic innovations behind the emergence of the Grameen Bank attracted the attention of the Norwegian Nobel Committee as an innovation worthy of the Peace Prize (as opposed to the Nobel Economics Prize) because it rectifies financial injustice, not just with rhetoric, but in a way that works. Is it any wonder that the movement has gained momentum?

UN graphic
Microfinance is still considered a relatively new strategy to combat poverty, but the model has been studied and copied enough that some preliminary conclusions can be drawn about its rightful role in international development. Proponents point to the fact that microcredit does a better job targeting the poor, and it offers a smart alternative to the top-down macroeconomic approaches that have characterized traditional development policy strategies. Critics suggest that microcredit by itself is ineffective at targeting the poorest, and it may also be at odds with public welfare programs, so its role should be limited to the informal sector.

The United Nations Millennium Declaration, signed in September 2000, set eight goals for the UN member states to reach by 2015. The first of these is to reduce by half the proportion of people living on less than one U.S. dollar a day. What role is microfinance playing in the reduction of poverty in the developing world? To what degree is microfinance, in fact, a panacea?

This essay first discusses some basic features of microfinance programs and explains why they work. The subsequent section discusses some of the major criticisms of microfinance programs. The final section draws implications for microfinance programs in general and the role of microfinance in the global fight against poverty in particular.

Go To Principles of Microfinance

© 2007, ProQuest CSA LLC. All rights reserved.

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