Microfinance
Microfinance — small loans to poor people without traditional collateral — was pioneered by Grameen Bank in Bangladesh and won Muhammad Yunus the 2006 Nobel Peace Prize. The model spread globally to reach ~140 million active borrowers. Subsequent randomized evaluations have moderated initial expectations: microfinance does not lift people out of poverty on average, but it does increase business activity and smooth consumption.
Key insights
Grameen pioneered group lending
Grameen Bank's innovation: lend to women in groups of 5, with social pressure substituting for collateral. The model spread to 100+ countries. Repayment rates were 95%+ in early years — far above pessimistic expectations for unsecured lending to the poor. By 2024, Grameen has ~10 million borrowers in Bangladesh; spinoff models reach tens of millions more globally.
RCT evidence has moderated expectations
Banerjee, Duflo, Karlan and others have run randomized evaluations of microfinance in India, Mexico, Mongolia, Bosnia, Morocco. Results: microcredit does not on average lift households out of poverty, doesn't substantially increase income or consumption for most borrowers. It does: enable some entrepreneurship, smooth consumption shocks, give women financial agency. The original 'poverty escape' narrative was oversold; the actual benefit is more modest.
Mobile money has become the bigger story
M-Pesa Kenya (2007) demonstrated that mobile money — separate from microcredit — could transform financial inclusion. ~1.6 billion mobile money accounts globally. Sub-Saharan Africa has 50%+ adult mobile money penetration. Payments, savings, remittances, micro-insurance flow through mobile money rails. The financial-inclusion outcome that microfinance was supposed to deliver has come more from mobile money than from microcredit.
Active microfinance borrowers by region
Millions of borrowers
Key Finding: South Asia (India, Bangladesh, Pakistan) leads in absolute numbers; Latin America has high per-capita penetration.
Mobile money account growth 2010–2024
Registered mobile money accounts, billions
Key Finding: From 0.1B (2010) to 1.6B (2024). Sub-Saharan Africa leads in penetration.
Methodology & caveats
Microfinance institutional types
Grameen Bank model: group lending with social collateral. Banco Sol model: village banks. Modern MFIs: more individualized lending. Commercial microfinance vs nonprofit MFI vs cooperative — different governance and pricing. SKS (India) IPO controversy (2010) exposed tensions between commercial and social-mission goals.
Interest rate critique
Median microloan rates: 14% real, often higher. Critics argue: rates exploitative; supporters argue: rates reflect high cost of small-loan administration, default risk, capital cost. Comparison to alternatives matters — local moneylenders often charge 50-100%+. Microfinance is cheaper than informal alternatives, more expensive than commercial banking accessible to better-off.
RCT findings in detail
Banerjee-Duflo-Karlan et al. 2015 meta-analysis: small but positive effects on business investment, consumption smoothing, women's empowerment. No effects on income, consumption, education, health in most settings. The headline 'no effect' obscures positive effects on smaller margins. Recent work explores: longer-term effects, savings products, asset transfers (graduation programs).