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Grameen Bank

The Microfinance Mystery

Martin Ravallion's picture

For the last two years, there has been a mystery about the evidence supporting the past favorable assessments of the scope for reducing poverty using microfinance instruments such as the famous Grameen Bank (GB). The chances for many poor people to benefit from access to this form of credit rest, in part, on solving that mystery.

To understand the mystery we need to go back to an influential paper by Mark Pitt and Shahidur Khandker (PK), published in the 1998 volume of the Journal of Political Economy. PK documented research supported by the World Bank—research that came to provide the most cited scholarly evidence yet to support the view that microcredit helps reduce poverty.  

Microcredit deserves support to benefit the poor

Shahid Khandker's picture

Microcredit has been in the spotlight lately. This innovative banking program, pioneered by Professor Muhammad Yunus, has created the option for millions of poor people, especially women, to become self-employed entrepreneurs.  By empowering women, microcredit has created opportunities to lift countless families out of abject poverty.  Clearly, this has been a net gain for society.  Yet current criticism of microcredit points to its failure to alleviate poverty, high indebtedness of borrowers, high interest rates, coercive loan-collection tactics, lack of transparency in public fund management, and uncertainty of succession in leadership.