PDF_logo How Does Microcredit Work? A Review of the Theories of Microcredit.

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How Does Microcredit Work? A Review of the Theories of Microcredit.

Paper No:35

Author:S.R. Osmani and Wahiduddin Mahmud



The remarkable speed at which the reach of microcredit has expanded around the world in the last three decades has piqued the curiosity of practitioners and theorists alike. While assessing  the impact of microcredit on the lives and livelihoods of the poor remains a contentious issue, there is no disputing the fact that there is something novel, something special, about microcredit that has allowed an altogether new mode of financial intermediation to emerge, providing credit to millions of hitherto ‘unbankable’ poor without breaking the lender’s back. That is an extraordinary achievement in itself. Theorists have been keen to unearth the secrets behind this remarkable achievement. In particular, they have tried to understand why is it that the special features of microcredit seem to work, at least in terms of embracing those who were previously excluded from the formal credit market, without compromising the financial viability of the lenders. This has led to an enormous outpouring of theoretical speculations, often drawing upon the latest theoretical advances in economics and finance.

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