6 ideas
When microcredit funds many new micro-enterprises selling the same simple goods into a local economy whose demand hasn't grown, each new entrant mostly takes sales from existing ones. Net income and employment barely rise, and prices and margins fall for everyone. Counting borrower success stories misses the losses among the displaced sellers.
Microloans are small, short-term, high-interest, and repaid weekly. Those terms push borrowers toward activities with instant cash turnover, like street vending and simple resale, and away from ventures that need scale, technology, or long payback periods. The loan design builds an economy of tiny, low-productivity, non-growing units.
Successful developers such as East Asian economies and parts of postwar Europe grew by channeling finance into larger, technologically upgrading firms, industrial clusters, and supply-chain links, often through state-guided development banks. A glut of isolated microenterprises lacks the economies of scale, learning, and linkages that raise economy-wide productivity. Microfinance therefore pushes the economy in the wrong direction.
Microcredit spread less because of evidence than because it fit a market-fundamentalist agenda. It recasts poverty as a lack of individual entrepreneurship, puts the risk on poor individuals, and substitutes for state spending on infrastructure, welfare, and industrial policy. Seen this way, its appeal to donors is explained by its politics rather than its results.
Once microfinance institutions shifted to profit-seeking and investor ownership, they had incentives to push loans, raise effective interest rates, and grow lending volume without regard to what borrowers could productively use. The result is over-indebtedness, loans taken to repay other loans, and value transferred from poor borrowers to lenders and shareholders. The Andhra Pradesh crisis, with its borrower suicides, is offered as evidence.
After the war, donors poured microcredit into Bosnia and Herzegovina as the main tool for reconstruction. It financed a mass of small trading and service micro-businesses with high failure rates. Meanwhile, the viable manufacturing firms and cooperative structures that could have rebuilt a productive economy were starved of suitable finance, and local economies grew more fragmented and informal.