Unintended Harm

Microcredit is increasingly being discredited as a way of fighting
ultra-poverty, due to 
borrower indebtedness.
   Microcredit works best for people above the poverty line.

Aid can sometimes harm

Microcredit has been a popular way of addressing large-scale global poverty in recent decades.  And for a long time, high microloan repayment rates were seen as evidence that microcredit programmes were working well.

However, perceptions are changing. 

Research done between 2003-2012 shows that microcredit hasn't led to significant improvements in poverty reduction. It can even make the poor worse off - for example, research from 2013 in Cambodia showed that 22% of microcredit borrowers studied were either insolvent or over-indebted.

In fact, savings schemes are now considered a better strategy than helping people borrow their way out of poverty.  

And those high repayment rates mentioned above are often only achieved by people selling their only assets, or borrowing from other money lenders and family to repay the loans.  This means the poor are caught up in a cycle of debt.  Changes in income should be the key indicator when looking at programme success not repayment rates.


Reasons why microcredit hasn't lifted most people out of poverty:
  • Microloans are often used for basic consumption instead of enterprise.
  • Microcredit is expensive money for the ultra-poor - interest rates are up to 40% per annum. Unless a microenterprise is very profitable people have difficulty repaying the loans.
  • Microcredit requires the poor to have business and marketing skills to grow profitable microenterprises - this is challenging for people with low literacy rates who live in isolated areas and are survival-focused.
  • When microcredit is used for enterprise, it is used for businesses with low pricing/negotiating power and small margins which operate in saturated markets.