New Orleans I try to resist spending much time and energy, either mine or yours, on “I told you so stories”. Maybe not as much as I should, but some anyway. It’s been a minute since I chimed in about microfinance and the outrageous proposition that this was a way to end or alleviate poverty. Over the last several decades we have harped on this theme repeatedly, initially as a voice in the wilderness, but more often in the last decade as one of many who have pointed out that this emperor is wearing no clothes or rags at the best. We’ve issued reports with this theme. We’ve run studies in Social Policy. Our position is clear: debt doesn’t end poverty. How could anyone seriously believe this would work?
My excuse for crawling back on this soapbox is a current article on this theme in the Wall Street Journal. They note that,
Academic studies, including randomized controlled trials, have found that microfinance doesn’t improve the economic conditions of most borrowers. Economists found excessive microfinance lending has set off repayment crises for borrowers in half a dozen countries, including Bosnia, India and Cambodia.
I’m not saying that of the millions who have outstanding loans that no one ever crawled up this slippery ladder. I’m saying what was obvious, and increasingly has been proven in the field by more objective voices, that the theory was wrong and the practice is worse. The exceptions at best prove the rule.
It’s gotten very bad as well.
Last year, microfinance lenders around the globe had outstanding loans valued at $219.7 billion to more than 140 million borrowers, according to calculations from Atlas, which collects annual data from the sector for Italy-based rating agency MFR. The size of the loans also has ballooned, increasing payment burdens. Borrowers owed an average of $1,381 in 2025, nearly double what it was in 2009, according to Atlas. The Wall Street Journal viewed individual loan contracts as high as the tens of thousands of dollars.
If anyone ever visited a microfinance operation and talked to the staff and the borrowers, it was obvious there were problems. The model was bad from the beginning. Interest rates were wildly excessive, some as high as 400%. Daily payments were required, so that staff often did little but collect the payments. Like debt collectors everywhere, there is always a thin line close to complete thuggery. All of this seemed more like loan sharking with a scarf on it than any kind of real social or economic development plan. People were borrowing to buy sewing machines to do piece work for multinationals or try to develop money crops rather than something sustainable. This was almost criminal capitalism.
High interest rates, which can top 100% in some Latin American countries, and pressure tactics by loan officers have been tied to suicides, homelessness and children pulled from school to work. Rather than using the loans to invest in small businesses, many borrowers spend the money on medical expenses and other necessities.
Who can blame them? Why shouldn’t lower income families grab the brass ring of this scam to try and survive? To me it seemed almost a proper way to deal with a predatory program. No one pushed the button to stop this merry-go-round. In fact, even worse players piled in,
Drawn by high interest rates and a low number of defaults, Wall Street and other banks piled into the market. They bought stakes in microfinance lenders, extended financing or sold securitized microfinance debt. More capital came from taxpayer-funded development agencies such as the U.S. International Development Finance Corp. and the World Bank.
Families were chained to the loans. As long as the lenders made their vig, they kept rolling. The microfinance system was working for the lenders, but they had no allusions that they were addressing poverty, rather than profit.
Debt isn’t a poverty reduction program. Never will be.