Microcredit programs are designed to give small scale loans to individuals in the developing world to start their own microenterprises. Photo Credit: Flickr

Microcredit—the extension of small loans to very poor people—has grown rapidly in the past decade, reaching tens of millions of individuals around the world and providing billions of dollars in loans. ¹From the very beginning of the microcredit movement, the presumption has been that the poor lack access to formal financial services, particularly to nonusurious credit. In some of the rhetoric of the movement, it has even been presumed that the poor are deliberately "excluded" from access to credit.

The response has been to democratize credit, providing access to all. Such access, it is thought, will enable the poor to work themselves out of poverty by investing in microbusinesses or asset acquisition, which in turn will feed into economic growth. Pick up almost any article on microfinance in the last 15 years (or more recently any microfinance website) and you will find assertions that reinforce this notion:

The women I've met in Uganda and Guatemala are so resourceful, and it's just amazing to see how, with their courage and diligence, they create small businesses with such tiny amounts of money. ²

[T]he bank gave her a loan of . . . 25 USD. Such a small sum to start a business seems laughable, but this was no joke—this was "microcredit," designed for would-be entrepreneurs in poor areas. ³

Microcredit programs have successfully contributed to lifting people out of poverty in many countries around the world. ⁴

History has a lot to teach us about the credit-for-everybody notions of microfinance.

The mission of the Microcredit Summit Campaign:

Working to ensure that 175 million of the world's poorest families, especially the women of those families, are receiving credit for self-employment and other financial and business services by the end of 2015. ⁵

We have seen how access to loans and deposit services has empowered millions of people to work their way out of poverty. . . . Microfinance is a powerful tool to fight poverty. Poor households use financial services to raise income, build their assets, and cushion themselves against external shocks. ⁶

Moreover, the 2006 Nobel Peace Prize winner and founder of the Grameen Bank, Muhammad Yunus, has famously called credit a human right. ⁷

As many practitioners of microcredit (including this author) have learned, however, money is fungible—it can be used for anything. Although we knew that in the abstract, it became real as we began to see poor borrowers use their loans for what the industry has come to call "consumption smoothing," ironing out the highs and lows in cash flow so that crises can be met or large purchases made. But that very term suggests that the microcredit movement is not all that comfortable with the idea of "consumption" plain and simple, since it is implicitly recognized that making it possible for poor people to use credit for goods and services (even if some, such as medicine or education, are necessary) is not really what microcredit started out to do.

As many practitioners of microcredit have learned, money is fungible — it can be used for anything.

Those of us who work or have worked in microfinance in fact step gingerly around a number of things that underpin our work. We tend to skirt the question of consumption and spin euphemisms around the question of whether the poor invest their loans in business with terms like "microenterprise," "entrepreneurial agents," and "income-generating activities."

History—the history in the "north" of formal and informal credit use for business investment, and the history of formal and informal credit use for consumption—has a lot to teach us about the credit-for-everybody notions of microfinance. Its lessons might bring our expectations of microfinance more into line with reality. For the economic history of the rich nations strongly suggests that:

• earlier forms of microcredit never played a significant role in business start-up or small business development,
• the first efforts at democratizing financial services were almost entirely savings and "thrift" based,
• economic development in fact came before (or at best alongside) the movements to democratize financial services, and
• when credit for the poor did come along, it followed the savings movement and developed almost entirely in relation to consumption.

Microcredit seems to have long been on a path that does not lead to the kinds of results that a great many practitioners and advocates have hoped it would.

If those lessons are valid, microcredit, still the dominant service in microfinance, seems to have long been on a path that does not lead to the kinds of results that a great many practitioners and advocates have hoped it would.

I will not deal here with the assumption that the poor are entrepreneurial. The distribution of entrepreneurial character is pretty much the same everywhere in the world. Some people have it, others do not. It is not surprising that many people think the poor in developing countries are nascent businesspeople; after all, most of them must take to the informal marketplace to generate small amounts of cash, and that is what makes them seem like they are engaged in business— but that is subsistence activity, a sort of default mode, and not what I call "real" business. If all other things were equal, one would see quickly and clearly that, as in the West, only a minority will make their careers as entrepreneurs.

Instead, this study is meant as a survey of the history of access to credit and its use in the advanced industrial countries during the main period of their development, beginning in the late 18th century and continuing into the mid-20th. The emphasis will be on North America and Great Britain, with some reference to Germany. But the subject and the literature are extensive, and a more thorough review could add much by looking at the rest of Europe and Japan as they became "developed."

Notes:

¹Microfinance (MF) is the current, more comprehensive name of a movement that began by calling itself microcredit. Although credit still represents the lion's share of the financial services offered under the name microfinance, the newer name is meant to convey that the field now also promotes savings, insurance, and remittance transfers. A microfinance institution (MFI) can be a bank, a nongovernmental organization, a nonbank financial institution such as a finance company, or a cooperative such as a credit union. Because of the expanded definition of MF and the wide range of institutions, it is difficult to gauge accurately the extent of the industry. Organizations such as the MicroCredit Summit Campaign, whose mission is to promote microfinance, claim that MF reaches close to 100 million poor families. The Microfinance Information Exchange (MIX), estimates roughly 30 million credit clients worldwide. There are currently 818 MFIs registered with MIX. At the end of 2005, of 488 MFIs reporting data, 92 percent had fewer than 100,000 active borrowers. Of those same 488 only 5 organizations (4 of which are in Bangladesh) reported more than 1 million clients.

²Natalie Portman, actress and spokesperson for the International Year of Microcredit, www.yearofmicrocredit.org.

³Larry Baum, "The Year of Microcredit," Human News, September 29, 2005, ideaexplore.net.

⁴United Nations Department of Economic and Social Affairs, www.un.org.

⁵microcreditsummit.org.

⁶Brigit Helms, Access for All, Building Inclusive Financial Systems (Washington: Consultative Group to Assist the Poor, World Bank, 2006), pp. ix, xi.

⁷He has made that statement many times since the 1980s, most recently in Muhammad Yunus, "What Is Microcredit?" August 2006, www.grameen-info.org.




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Contributed by Thomas Dichter, the author of Despite Good Intentions: Why Development Assistance to the Third World Has Failed (Amherst: University of Massachusetts Press, 2003). He has worked in international development since 1964 in a variety of institutions including the World Bank, the United Nations Development Programme, the Peace Corps, and numerous nongovernmental organizations. Reprinted with permission from The Cato Institute.

To read another Global Envision article about microfinance, see The Microfinance Moment.

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