ABSTRACT
In the early days of microcredit, it was taken as axiomatic that access to credit would bring economic benefits for the poor. This belief was based on the recognition that credit plays an important economic role by acting as a bridge between the present and the future. Costs of production are incurred in the present, but returns will accrue only in the future. If the producer doesn’t have enough capital to cover the costs, access to credit becomes essential in order to ensure that profitable activities can, in fact, be undertaken. Similarly, in the face of negative shocks of various kinds, access to credit enables a household to protect its current level of consumption by borrowing against future income and thus helps avoid excessive hardship in adverse circumstances. Poorer households have traditionally been deprived of these economic benefits of credit because the formal banking system was not willing to lend to them, while village moneylenders, who might be willing to lend, charged exorbitant rates of interest. Faced with the credit constraint, poor people were thus less able to undertake potentially profitable economic activities and to avoid excessive fluctuations in consumption. It was, therefore, reasonable to expect that once they gained access to credit, they should be able to improve their economic well-being by earning more from productive activities and by being better able to smooth consumption over time.
