Does microlending really help the poor?

There are few real miracles in this world, but microfinance is meant to be one. It is banking for the poor in the developing world.

Part of it called microcredit, means lending tiny amounts of money to people so they can run small businesses.

The theory is that those businesses enable individuals to earn more money, and so strengthen the whole economy. The aim is to lift large numbers of people out of poverty.

One of the chief founders of the movement is Nobel-Prize winner Mohammad Yunus, who created Grameen Bank in Bangladesh which lends money to many low-income workers, especially women.

He told Lesley Curwen that it really does raise people's incomes.

Debt trap

But recently serious questions have begun to emerge about this sort of lending and whether people really do benefit.

The BBC's Jo Fidgen has been looking at how the microfinance industry provides capital for small and medium-sized enterprises, or SMEs, in Zambia. She found that the high interest rates charged - often 60% - can put borrowers in a debt trap.

Effectiveness challenged

Academics have been trying to work out from the evidence whether microcredit does actually raise people's incomes.

But it's been hard to do a proper scientific survey, since you need to compare those who do get a loan with a control group of similar people who don't.

Dean Karlan, professor of economics at Yale University, has managed to do it - with a control group - in the Philippines. His results raise some serious questions about the effectiveness of microcredit in reducing poverty.

First broadcast on 29 July 2009