A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History

This paper studies the role of microfinance in entrepreneurship development, poverty alleviation, and economic development. It finds that:

• When the poor in the advanced countries began to have widespread access to formal credit, it was for consumption;
• Self-financing (savings) or borrowing from a close social network has generally been used for business start-ups;
• Formal bank credit was used by established businesses;
• Working poor used various savings mechanisms;
• Poor farmers often got their inputs through supplier credit.

The paper concludes that:

• Credit and savings services and their role in development have not really changed;
• Average poor person in the past (and today) is not an entrepreneur, and when s/he has access to credit, it is largely for consumption or cash flow smoothing;
• The average entrepreneur prefers to start with informal credit or savings rather than formal credit;
• The best financial services for poor or low-income people are savings-based services.