ABSTRACT
With almost a billion of the world's population living in poverty, one of the leading challenges facing policy-makers is to come up with strategies that appreciably raise the standard of living of the poor. One strategy that has attracted widespread attention is to help the poor help themselves by providing microcredit. What is notable is that this credit is not subsidized — although repayment rates are high (up to 98 per cent), interest rates are often much steeper than for bank credit. Microcredit is provided through nonstandard channels by what are called microfinance institutions (MFIs), which in the late twentieth century grew rapidly in number and outreach, and by 2003 were serving over 150 million people worldwide (Honohan 2004). While these institutions are diverse in their outlook, size and policies, they are perceived to provide ‘win—win’ solutions to the problems of the poor in developing — and increasingly also in developed — countries. This paper reviews the role MFIs can play in alleviating the distortions that prevail in rural credit markets, and the challenges they face.
