Development and the Role of Microcredit

Abstract

Microcredit is a concept that has gained widespread acceptance by international development agencies and major donors. It is viewed as a way to correct both governmental and market failure in Sub‐Saharan Africa. Many view microcredit as a method for linking the formal and informal sectors of African economies to increase the reach of the formal sector. Extending the reach of the formal economy through microcredit is possible, and desirable, depending on macroeconomic reforms, respect for traditional financing relationships, and local control of institutions. However, very little has been done to determine the extent to which microcredit programs actually increase economic well‐being. The model program, Grameen Bank of Bangladesh, has been studied and evaluated, but replications may not be inherently successful. The literature accepts that microcredit will increase economic well‐being, if programs are correctly designed. Program design issues cannot be resolved, however, until economic well‐being is measured and associated with specific designs.