- Microfinance boomed as a development trend in the early 2000s as it was appealing to varying political perspectives and was also seen as a major innovation in poverty reduction policy. Starting with the Grameen Bank in Bangladesh in 1976, microfinance spread to Latin America in the 1980s, and later to Africa and developed countries. However, since its rise in popularity, some have questioned its effectiveness, as many advocates of microfinance touted anecdotal studies and high repayment rates as proof of its success. This qualitative evidence clashed with current development trends of randomized control trials and the need to quantitatively verify and implement “what works”. It has also been criticized for purposes related to its management and structure, and that it does not fully reach its target population – the extremely poor. However, recent innovations address some of these critiques; for example, person-to-person microfinance facilitates funding to microfinance institutions, new banking technology reduces the transactions costs of providing loans, and other programs that target the extreme poor by making the acquisition and repayment of loans easier. The purpose of this thesis is to synthesize the immense body of literature surrounding microfinance and evaluate its progress and limitations with eliminating poverty. Further, the thesis will comment on the current state of microfinance throughout the world, identify some innovations that respond to its many critiques, and attempt to determine whether it is still a relevant poverty-eliminating tool.
- Key Words: Microcredit, microfinance, microloans, financial inclusion, poverty