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Impact of microfinance on the poorest by sylvng

There’s an article published by Standford Social Innovation Review that argues that microfinance is not the cure to poverty. In fact, evidence would suggest that microcredit only makes the poorest of the poor even less well off, and the article goes on to suggest that the best way to alleviate poverty is to support large, labor-intensive industries in job creation. I’m no expert but the arguments are fairly compelling, and to quote it:

“To understand why creating jobs, not offering microcredit, is the better solution to alleviating poverty, consider these two alternative scenarios: (1) A microfinancier lends $200 to each of 500 women so that each can buy a sewing machine and set up her own sewing microenterprise, or (2) a traditional financier lends $100,000 to one savvy entrepreneur and helps her set up a garment manufacturing business that employs 500 people. In the first case, the women must make enough money to pay off their usually high-interest loans while competing with each other in exactly the same market niche. Meanwhile the garment manufacturing business can exploit economies of scale and use modern manufacturing processes and organizational techniques to enrich not only its owners, but also its workers.”

Of course, the analysis is focused mainly on banks and not non-profits who offer other services other than pure financing, but I am very curious to see what the general opinion is out there. For the most part I have only heard good things about microcredit so it’s always good to get some fresh perspectives.

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