Microfinance was once celebrated as Asia’s tool to lift people out of poverty. From Bangladesh to India, Cambodia and the Philippines, the promise was simple: provide small loans to low-income households, help them start businesses, increase income and escape poverty.

Pioneered in the 1970s, microfinance was designed to provide financial services to low income people typically excluded from traditional banking.

Small loans, usually between US$200 and US$500 were particularly targeted at empowering women to start businesses and support their families. According to the World Bank, more than 1.7 billion people do not have access to banking.

Yet decades of experience suggest that credit alone has not delivered the transformation to economic independence promised.

We need to ask a difficult question: what if we solved the wrong problem?

Based on flawed assumptions

One fundamental problem is the assumption that poor households in developing nations lack capital but have profitable investment opportunities.

In reality, many poor families operate very small businesses such as food stalls, small shops, farming, tailoring or petty trading. These activities are often labour intensive and face intense local competition.

Giving more people loans can therefore........

© The Conversation