Microfinance – Promise or Peril?

Has any one being following the debate on whether microlending is effective in improving economic conditions in countries?


Muhammad Yunus and Grameen Bank (the bank he founded) together won the 2006 Nobel Peace Prize “for their efforts to create economic and social development from below” by advancing microloans to economically underprivileged Bangladeshis. While this has been a major positive social development, is this an approach that can contribute to improving the economy of Bangladesh as a whole?


In a piece published in the Wall Street Journal (Phelps’s Prize*, January 29, 2007, Page A16) Amar Bhide and Carl Schramm suggest that microfinancing is more useful for the underprivileged in already developed economies whereas structural reforms are needed to substantially improve living standards in underdeveloped economies. An example of this line of thinking would be that the economically disadvantaged in inner cities in the US may be able to leverage microenterprise into substantially improving their condition. This progress will enable them to improve their neighborhoods because those are embedded in a system which can provide the resources needed for development at relatively low cost.

In contrast, structural problems in underdeveloped economies e.g. corruption, ineffective financial systems, illiteracy, inadequate transportation, etc., make it difficult for entrepreneurs to advance beyond a certain level because further substantial improvement requires resources that they simply cannot afford to obtain. For instance a vegetable grower cannot overcome the problem of country-wide poor transportation that damages his produce on the way to larger markets. Or a dressmaker cannot afford the cost of inefficient export regulations and corruption to ship her clothes to a foreign boutique. Thus while microfinancing is useful in bringing some relief to poor citizens it is not the means to develop the economy of a country, which is what is essential to substantially improving living conditions for all citizens.

* Edmund S. Phelps won the 2006 Nobel Prize in Economics “for his analysis of intertemporal tradeoffs in macroeconomic policy”. Strictly speaking he won the 2006 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.


One response to “Microfinance – Promise or Peril?

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