100 million poor households by 2005.
As James Wolfensohn, the president of
the World Bank, has been quick to
point out, helping 100 million house-
holds means that as many as 500–600
million poor people could benefit. In-
creasing activity in the United States
can be expected as banks turn to mi-
crofinance encouraged by new teeth
added to the Community Reinvestment
Act of 1977 (Timothy O’Brien 1998).
The programs point to innovations
like “group-lending” contracts and new
attitudes about subsidies as the keys to
their successes. Group-lending con-
tracts effectively make a borrower’s
neighbors co-signers to loans, mitigat-
ing problems created by informational
asymmetries between lender and bor-
rower. Neighbors now have incentives
to monitor each other and to exclude
risky borrowers from participation, pro-
moting repayments even in the absence
of collateral requirements. The con-
tracts have caught the attention of eco-
nomic theorists, and they have brought
global recognition to the group-lending
model of Bangladesh’s Grameen Bank.
2
The lack of public discord is striking.
Microfinance appears to offer a “win-
win” solution, where both financial in-
stitutions and poor clients profit. The
first installment of a recent five-part se-
ries in the San Francisco Examiner, for
example, begins with stories about four
women helped by microfinance: a tex-
tile distributor in Ahmedabad, India; a
street vendor in Cairo, Egypt; an artist
in Albuquerque, New Mexico; and a
furniture maker in Northern California.
The story continues:
From ancient slums and impoverished vil-
lages in the developing world to the tired in-
ner cities and frayed suburbs of America’s
economic fringes, these and millions of other
women are all part of a revolution. Some
might call it a capitalist revolution . . . As
little as $25 or $50 in the developing world,
perhaps $500 or $5000 in the United States,
these microloans make huge differences in
people’s lives . . . Many Third World bank-
ers are finding that lending to the poor is not
just a good thing to do but is also profitable.
(Brill 1999)
Advocates who lean left highlight the
“bottom-up” aspects, attention to com-
munity, focus on women, and, most im-
portantly, the aim to help the under-
served. It is no coincidence that the rise
of microfinance parallels the rise of non-
governmental organizations (NGOs) in
policy circles and the newfound attention
to “social capital” by academics (e.g.,
Robert Putnam 1993). Those who lean
right highlight the prospect of alleviat-
ing poverty while providing incentives
to work, the nongovernmental leadership,
the use of mechanisms disciplined by
market forces, and the general suspicion
of ongoing subsidization.
There are good reasons for excite-
ment about the promise of microfi-
nance, especially given the political
context, but there are also good reasons
for caution. Alleviating poverty through
banking is an old idea with a checkered
past. Poverty alleviation through the
provision of subsidized credit was a cen-
terpiece of many countries’ develop-
ment strategies from the early 1950s
through the 1980s, but these experi-
ences were nearly all disasters. Loan re-
payment rates often dropped well below
50 percent; costs of subsidies ballooned;
and much credit was diverted to the po-
litically powerful, away from the in-
tended recipients (Dale Adams, Douglas
Graham, and J. D. von Pischke 1984).
2
Recent theoretical studies of microfinance in-
clude Joseph Stiglitz 1990; Hal Varian 1990; Timo-
thy Besley and Stephen Coate 1995; Abhijit
Banerjee, Besley, and Timothy Guinnane 1992;
Maitreesh Ghatak 1998; Mansoora Rashid and
Robert Townsend 1993; Beatriz Armendariz de
Aghion and Morduch 1998; Armendariz and Chris-
tian Gollier 1997; Margaret Madajewicz 1998;
Aliou Diagne 1998; Bruce Wydick 1999; Jonathan
Conning 1997; Edward S. Prescott 1997; and Loïc
Sadoulet 1997.
1570
Journal of Economic Literature, Vol. XXXVII
(
December 1999
)
