What Are Microcredits? 

Let’s start with the basics to make sure we’re talking about the same thing. In the context of poverty alleviation, microcredits refer to small loans — often between $50 and $500 — given to people living in poverty. These loans come with interest rates that typically range from 20% to 30%, sometimes even higher. The goal is to help recipients start small businesses and improve their livelihoods.

High repayment rates — often cited at 95% and above — are frequently used as evidence that microcredits achieve their intended goal. While we don’t doubt the accuracy of these figures, there’s room to question how exactly they should be interpreted—but I’ll get to that shortly.

The Global Rise of Microcredits 

Microcredits entered the global spotlight when Muhammad Yunus and his Grameen Bank received the Nobel Peace Prize in 2006 for pioneering microcredits. By providing loans primarily to women, they helped redefine the narrative around lending to the poor — from being seen as risky or predatory to being hailed as a tool for empowerment and poverty reduction.

The promise was simple yet powerful: small loans could turn the poorest individuals into entrepreneurs. And for a time, it felt like a breakthrough.

When Optimism Met Evidence

In the years since, economists have taken a closer look. Six large, independent studies conducted in the early 2010s — across countries from India to Mexico — came to a strikingly similar conclusion: on average, microcredit recipients didn’t earn more income over time.

Some studies observed modest benefits, like increased time spent on business activities or small shifts in spending habits. But overall, the impacts were limited. As another Nobel laureate, Abhijit Banerjee, put it in the meta-analysis of six studies: “We note a consistent pattern of modestly positive, but not transformative, effects.”

For some, the sobering results of these studies came as a surprise. For others, they simply confirmed what had long seemed likely — that the expectations placed on microcredits were too high from the beginning. Economist Bruce Wydick put it well:

In fact, many low-income Americans today are burdened with crippling credit card debt, illustrating how access to credit doesn’t necessarily translate to financial security.

Our takeaway: Microcredits may have value, but they haven’t delivered the sweeping economic transformation many once hoped for.

Yes, There Were Benefits

Early hopes for microcredits were sky-high, and while they didn’t lift millions of people out of poverty, they still brought real advantages:

• More financial choice: With clear and fair rules, microcredits can be a safer and more reliable alternative to informal lending. People know when they can access a loan and, by keeping up with small, regular repayments, they can build trust and qualify for future credit. It can also ease the social strain of borrowing from friends or family.

• Greater access: Microcredits helped expand financial access and inclusion. One of their key achievements was bringing financial services to underserved communities, in particular people living in poverty, who would often be excluded from formal banking systems. Through joint liability groups, many were able to access loans for the first time.

• A scalable model: Small-scale lending wasn’t invented by microcredits. People have always borrowed within social and business circles — and still do. What microcredit institutions did was to formalize this process, attract outside funding, and enable lending at a larger scale, including to those without access to informal options. In 2023, around 173.5 million people are microcredit borrowers.

• Local economic stability: Microcredits have become part of the financial fabric in many low-income regions, and they’re not easily replaced. In some cases, like in rural India, shutting down microcredit institutions led to wage drops — suggesting these loans helped sustain baseline economic activity. Such stability may not transform lives, but in fragile contexts, it matters more than it seems.

But Also Serious Harms

With scale came growing concerns. As thousands of microcredit institutions emerged, not all operated ethically. Some charged exploitative interest rates. Others enforced rigid and sometimes aggressive repayment systems.

In Sierra Leone, we’ve seen firsthand how pressure to repay can backfire. Group lending models—where all members are held responsible for each other’s debts—may keep repayment rates high, but they can obscure the personal cost behind those numbers. When one person struggles to pay, the burden often spills over, leading to shame, social exclusion, or harassment. In some cases, particularly for women, defaulting has even led to imprisonment—penalizing the very families they hoped to support.

We don’t believe microcredits are inherently harmful. Bad actors exist in any field, especially where money is involved — and sometimes, the issue lies in policies that fail to protect the most vulnerable. Still, these stories made us more cautious about what can go wrong when a well-intentioned idea scales rapidly without adequate safeguards to protect those it aims to serve.

A Bigger Critique: Is the Model Misguided? 

Some critics argue that microcredits don’t just fall short — they actually misallocate resources. By funneling capital into subsistence-level businesses with limited growth potential, the model may unintentionally block larger investments that could generate jobs and systemic change.

It’s a valid concern, though difficult to prove. What’s clear is this: microcredits often shift financial risk onto the poorest, asking them to shoulder the burden of entrepreneurship — without a safety net. Meanwhile, they have generated significant profits for banks and government aid agencies — with some arguing that this profit comes from exploiting millions of vulnerable people.

Why We Took a Different Path

Yes, we could have become a microlending organization — motivated by good intentions and a real commitment to making a difference. But we had to ask: would that really help people move out of poverty?

Here are the key reasons we said no:

• What about the 1 in 10 who can’t repay? If 90% succeed, what happens to those who fall short? That’s not a small detail — it’s a major consequence. In group lending, one default can penalize an entire community. We understand that group pressure may play a role in keeping repayment rates high, but it’s worth asking: At what cost? One study found that over 60% of microfinance clients faced harassment from group members to repay loans they couldn’t afford. That’s not the kind of support we aim to offer. We want to avoid harm — not just hope for benefit. 

• Microcredits are resource-intensive. Administering loans and collecting interest requires complex infrastructure and comes with significant costs. As a small organization with limited resources, we knew these costs would reduce what we could give directly to those in need.

• We wouldn’t recommend it to a friend. Would we tell someone already struggling to take out a loan with 30% interest? Probably not. That gut check mattered to us.

• Poverty doesn’t look the same for everyone. Microcredits tend to work best for those already equipped with entrepreneurial skills. It often assumes a level of confidence, opportunity, and resilience that simply doesn’t exist for everyone. Our goal, however, is to support everyone facing poverty — not just those ready to start a business. Many people, such as older adults, caregivers, or those living with chronic illness, aren’t in a position to take on the risks of entrepreneurship. But they still deserve support, stability, and the chance to build a better future—on their own terms.

To sum it up: microcredits are one way to help and in some contexts can play a meaningful role. But for us, it wasn’t the right fit.

From Credit to Unconditional Cash

In our view, support should ease financial pressure — not add to it. If giving money helps, but repayment demands introduce a new layer of stress, then why not give small amounts with no strings attached?

This isn’t a radical idea. Unconditional cash transfers have existed for decades and gained visibility through organizations like GiveDirectly, founded in 2008. They’re grounded in a simple belief: people know best what they need. Dignity and choice are not rewards—they’re starting points.

That’s the model we chose: One that reimagines what meaningful support can look like — rooted in trust, personal agency, and the understanding that stability is the first step towards lasting change. 

In a future article, we’ll share more about how direct cash assistance can address some of microcredits’ shortcomings—and what the evidence says about no-strings-attached approaches to poverty alleviation.

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Studies consulted:
Banerjee, A., Karlan, D., & Zinman, J. (2015). Six randomized evaluations of microcredit: Introduction and further steps. American Economic Journal: Applied Economics, 7(1), 1–21. https://doi.org/10.1257/app.20140287

Cull, R., & Morduch, J. (2017). Microfinance and economic development (World Bank Policy Research Working Paper No. 8252). World Bank. https://drive.google.com/file/d/1fWppTiSyyMWFqkWwfBMmitEiqZ-4YVj3/view

Kiiru, J. M. M. (2007). Microfinance: Getting money to the poor or making money out of the poor? Finance & Bien Commun, 27(2), 64–73. https://doi.org/10.3917/fbc.027.0064