The Microfinance Promise - Journal of Economic Literature...

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Journal of Economic Literature Vol. XXXVII ( Decmber 1999 ), pp. 1569–1614 Morduch: The Microfinance Promise Journal of Economic Literature, Vol. XXXVII ( December 1999 ) The Microfinance Promise Jonathan Morduch 1 1. Introduction A BOUT ONE billion people globally live in households with per capita in- comes of under one dollar per day. The policymakers and practitioners who have been trying to improve the lives of that billion face an uphill battle. Reports of bureaucratic sprawl and unchecked cor- ruption abound. And many now believe that government assistance to the poor often creates dependency and disincen- tives that make matters worse, not bet- ter. Moreover, despite decades of aid, communities and families appear to be increasingly fractured, offering a fragile foundation on which to build. Amid the dispiriting news, excite- ment is building about a set of unusual financial institutions prospering in dis- tant corners of the world—especially Bolivia, Bangladesh, and Indonesia. The hope is that much poverty can be allevi- ated—and that economic and social structures can be transformed funda- mentally—by providing financial ser- vices to low-income households. These institutions, united under the banner of microfinance, share a commitment to serving clients that have been excluded from the formal banking sector. Almost all of the borrowers do so to finance self-employment activities, and many start by taking loans as small as $75, re- paid over several months or a year. Only a few programs require borrowers to put up collateral, enabling would-be en- trepreneurs with few assets to escape positions as poorly paid wage laborers or farmers. Some of the programs serve just a handful of borrowers while others serve millions. In the past two decades, a di- verse assortment of new programs has been set up in Africa, Asia, Latin Amer- ica, Canada, and roughly 300 U.S. sites from New York to San Diego ( The Econo- mist 1997). Globally, there are now about 8 to 10 million households served by microfinance programs, and some practitioners are pushing to expand to 1569 1 Princeton University. JMorduch@Princeton. Edu. I have benefited from comments from Harold Alderman, Anne Case, Jonathan Conning, Peter Fidler, Karla Hoff, Margaret Madajewicz, John Pencavel, Mark Schreiner, Jay Rosengard, J.D. von Pischke, and three anonymous referees. I have also benefited from discussions with Abhijit Banerjee, David Cutler, Don Johnston, Albert Park, Mark Pitt, Marguerite Robinson, Scott Rozelle, Michael Woolcock, and seminar partici- pants at Brown University, HIID, and the Ohio State University. Aimee Chin and Milissa Day pro- vided excellent research assistance. Part of the re- search was funded by the Harvard Institute for International Development, and I appreciate the support of Jeffrey Sachs and David Bloom. I also appreciate the hospitality of the Bank Rakyat In- donesia in Jakarta in August 1996 and of Grameen, BRAC, and ASA staff in Bangladesh in the sum- mer of 1997. The paper was largely completed during a year as a National Fellow at the Hoover Institution, Stanford University. The revision
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This note was uploaded on 05/11/2008 for the course AEM 4420 taught by Professor Christy,r. during the Fall '06 term at Cornell University (Engineering School).

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The Microfinance Promise - Journal of Economic Literature...

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