Microcredit, the extension of small loans to low‐income borrowers, was a darling of the aid industry for decades following the birth of the modern movement in 1983, when Muhammad Yunus established Grameen Bank in Bangladesh. The promise was enticing: a relatively simple, financially sustainable intervention able to lift millions out of poverty. It earned Yunus and Grameen Bank a Nobel Peace Prize in 2006 “for their efforts to create economic and social development from below.” By 2007, microcredit had blossomed into a global industry, with up to 25,000 microfinance institutions around the world serving perhaps over a hundred million borrowers.1
On one hand, the story of microcredit is one of the most impressive examples of achieving massive scale for social good, in this case through replication. On the other hand, some of the claims that fueled the hype have been disproven. Almost three decades after Grameen Bank was established, a number of rigorous evaluations were performed in different countries to measure the impact of microcredit on poverty. An analysis of six randomized control trials (RCTs) in the January 2015 edition of the American Economic Journal: Applied Economics found a “lack of evidence of transformative effects on the average borrower.” While microfinance made some positive contributions, such as smoothing incomes, expanding access to credit, and increasing business activity, there was no evidence it increased income or reduced poverty overall. ...
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