Helping impoverished people to help themselves is an important and noble calling. And so it is commendable that the Nobel Peace Prize was awarded to Bangladeshi economist Muhammad Yunus and Grameen Bank, the institution he founded. In its announcement, the Nobel committee praised pioneering efforts in lending small sums to impoverished people to start businesses.
However, microfinancing is not a magic bullet. Those wishing to help the poor must understand clearly the underlying causes of poverty before prescribing the best responses.
As a tool to help the poor, micro-financing involves providing small loans in support of commercial activities, most often those outside the formal economic sector.
Grameen Bank is widely praised for its innovative lending activities in support of tiny entrepreneurial ventures, many the initiatives of women. Doing good allowed the bank to do well, given that the poor can be generally trusted to repay loans.
This approach receives wide support, except from Marxist feminists who oppose anything that promotes markets while worrying about exploitation of the women who receive microcredit. But there are stronger reasons for questioning the effectiveness of microfinancing, if not its motives.
It is true that microfinancing is an improvement over previous policies, especially failed public-sector development aid or incentive-destroying redistributive schemes. It appears to succeed in helping generate improved standards of living among borrowers who gain access to funds.