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Confessions of a Microfinance Heretic by Hugh Sinclair

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Appendix Microfinance Economics 101

Economic theories supporting microfinance abound. The broadest principle is that of the efficient allocation of resources. The argument suggests that some people have excess cash, but do not face particularly interesting investment opportunities. Meanwhile, the poor face amazing economic opportunities but cannot realize them for lack of cash. Microfinance acts as a conduit to channel capital from A to B. This belief has some validity, but digging a little deeper reveals fundamental flaws in the microfinance model.

The first flaw in economic debates about microfinance relates to the abundance of profitable economic opportunities. This is often used to justify the extortionate interest rates charged the poor. ...

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