By Abdullateef Lawal, University of Sussex
Introduction
Poverty has been a major challenge in human history, with many people lacking the basic means of survival. Human societies have continuously devised different strategies to eradicate poverty, starting from early community based support systems to modern government sponsored welfare programs and international aid efforts. These strategies have impacted our society’s evolution, systems, resources, and values across various ages, cultures, and societies. Societies have also learned from each other’s successes and setbacks in eradicating poverty, as poverty reduction strategies and outcomes vary widely. For instance, poverty rates in countries with effective economic policies and welfare systems, like Finland, Netherlands, and Sweden, remain below 10% (Organisation for Economic Co-operation and Development, 2022). In countries like Haiti and Guatemala in the Americas face poverty rates exceeding 58% and over 80% in South Sudan in Africa, as reported by the World Population Review, 2024. These disparities signify how resource availability and different approaches shaped poverty reduction efforts across the world.
In recent years, a popular approach in poverty eradication in communities with high poverty rate is microcredit, a microfinancing approach aimed at empowering people living in poverty by providing capital to pursue self-sustaining economic activities. Microcredit appears to offer a path to economic independence, improved livelihoods, and increased self-confidence. However, Smith (2024) argues that microcredit can create debt cycles that ultimately counter its empowerment goals. Thus, this essay argues that giving poor people access to economic resources through microcredit schemes cannot lead to their empowerment.
The Mechanisms and Promise of Microcredit Scheme
Microcredit aims to provide small loans to people deemed “uncreditworthy” by conventional financial institutions. These loans are intended to uplift their livelihoods and promote self-reliance, particularly for those without access to formal credit systems. Unlike traditional loans, microcredit generally does not require collateral, making it one of the few accessible financing options available to people living in poverty. Supporters of microcredit often describe it as a form of empowerment for people in poverty. Professor Muhammad Yunus, the pioneer and leading advocate of microcredit, predicted that “poverty will be eradicated in a generation” and that future generations will only see poverty in a “poverty museum” (Yunus, 1997).
Microcredit typically aims at creating sustainable sources of income. The concept of empowerment, in microcredit scheme, goes beyond economic self-sufficiency, but also includes social changes such as increased decision-making power, self-confidence, and enhanced status within families and communities. Kabeer (1999) argues that empowerment goes beyond financial access to include agency and systemic freedom. A study by the World Bank found that Bangladesh reported improved income stability and food security especially among women. Similarly, microcredit has been shown to have positive effects on household resilience in other countries, helping families manage risks and emergencies. (World Bank, 2019)
However, Bateman posits that despite its potential, evidence suggests that while microcredit can provide temporary relief, it often does not establish long-term financial stability (Bateman, 2012). For instance, when Masoyi Microfinance Bank was introduced to my community in Kagara, Nigeria, in 2012, a daylong celebration event was held, sponsored by the bank. The event drew a large crowd, creating heightened awareness of the new financial opportunity. In a symbolic gesture of social acceptance, the bank’s head, Mohammed Abubakar Kagara, was even honored with a chieftaincy title by the late Emir of Kagara, Alhaji Salihu Tanko.
At first, people happily took out loans, as they believed it was a pathway to economic independence and honest financial inclusion. However, the excitement was short-lived as the reality of repayment set in. Many borrowers who are traders and farmers find themselves unable to repay the loan within the duration of the loan tenure, and the interest rate keeps growing. Their inability to repay the loan met severe consequences from the microfinance bank. In some cases, police were called to pressure debtors, whose inability to repay led to mounting financial burdens. Shops were shut down, and people lost their profits, savings, and capital, effectively becoming trapped in a cycle of debt and poverty. I recall Iya Misi, a local trader, lamenting to my mother, “This is a death trap. I am working harder but I can’t afford what I used to because all my earnings go to repaying this loan. It is like I am just an employee of Masoyi now, with both my income and capital going to them.”
The case of Masoyi Microfinance Bank proves this point. Although it provided short-term economic relief when it was introduced into the community, its operations only lasted until 2015. The bank struggles with high rates of default among borrowers and increasing hostility of the community members towards its staff. The bank and 65 other MicroFinancial Institution (MFIs) facing similar crises across Nigeria were shut down on September 26, 2018, by the Central Bank of Nigeria (CBN), and the Nigeria Deposit Insurance Company (NDIC) revoked their licenses. This highlights that merely giving poor people access to money, especially through microcredit schemes, cannot empower them, and it is not sustainable for both parties: the MFIs and the borrowers.
Commercialization of Microcredit
The commercialization of microcredit schemes has often shifted their focus from poverty eradication to profit generation. Many MicroFinancial Institutions (MFIs) have prioritized profit margins to maintain financial sustainability, frequently at the poor borrowers expense. For result-driven poverty eradication, solutions must be grounded in social support rather than a profit-driven model. In my experience working with business managers globally, through projects in Nigeria, international seminars, workshops, incubation programs, or in sourcing for partners and investors for my own business, I have observed that most business managers and leaders are not driven by moral obligations but by legal and societal pressures. They operate under the principles outlined by Milton Friedman, who stated in his 1970 article, “There is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Source: MIX Market data for 343 financial service providers
This ideology, which MFIs frequently adopt, can deepen poverty rather than eradicate it. The MIX data above explains the increasing growth of MFIs. In Nigeria and India, for instance, some MFIs have utilized technology to increase access to microloans for those living in poverty. Companies like Glola Tech Credit Limited in Nigeria operate through eight different apps as approved by Federal Competition & Consumer Protection Commission (FCCPC), allowing borrowers to easily take out additional loans within the same company. This setup often enables borrowers to borrow funds from one app to repay loans from another, trapping them in a vicious cycle of debt and enlarging the MFIs gross profit.
The pursuit of profit and pressure from investors can only nourish these debt cycles. In Bangladesh, where microfinance initially showed promise, the commercialization of MFIs has resulted in borrowers taking new loans to repay previous ones, trapping them in debt (Roodman, 2012). Similarly, in Mexico, the IPO of Compartamos Banco in 2007, originally a nonprofit, transformed the organization into a for-profit company. Compartamos’ shift to prioritize shareholder returns led to high-interest rates, often over 80%, with its valuation over $1.5 billion before enriching founders and investors. The world bank received it share of $210 million, the $1 million U.S. government fund Accion received grew to $350 million, much of which was used to seed additional profit-seeking microlenders. While it is understandable for MFIs to be commercialized for their sustainability, it should be done in a social business model, and not by mere name but by actions, because poverty eradication cannot be fully commercialized, else the advocates of microfinance should gracefully embrace it as a business and not lure those living in poverty into believing they are here to bring them out of poverty.
In their book “The Impact of Microfinance on Development”, Roodman and Morduch (2009) argue that while microfinance is often hailed as a “silver bullet” for poverty eradication, its benefits are neither uniform nor universally transformative. The microcredit scheme provides immediate financial support but fails to address the broader socio-economic factors essential for sustainable poverty eradication. It’s crucial to emphasize that poverty is a structural issue demanding structural solutions, not merely a treatment of its symptoms through financial aid or microloans. People or communities are not poor simply because they lack money, but because they also lack access to skills, opportunities, resources, and a robust support system to create wealth for themselves. Unfortunately, the resources that could have been used to address structural poverty have been used to enrich the wealthy and make the poor poorer through the microcredit scheme.
When a water hawker, popularly known as “Dr. H2O” from Onitsha, Nigeria, went viral on social media for his marketing strategy promoting the Aquafina brand, a subsidiary of Coca-Cola Nigeria, he received support worth over $5,000. However, he lost everything in less than a year. According to him, “I lost everything. Unfortunately, I was attacked. The business was worth about N8 million, they bought machines, a generator, and a freezer. I even informed one of the supervisors assigned to me by the company that I could not account for the money.” This was a grant given to him; let’s imagine if it had been a loan that he needed to repay with interest. Another example is the Nicaragua’s “No Pago” Movement in 2008-2009, when frustration from borrowers of microcredit resulted in the “No Pago” (I Won’t Pay) movement. Many borrowers, facing crippling interest rates and aggressive repayment plans, organized protests and refused to repay loans. This crisis led to the collapse of several MFIs and a loss of confidence in the sector. These examples illustrate that providing financial assistance through microcredit may not alleviate poverty and is not sustainable for both parties. As Bateman and Chang (2012) note, effective poverty reduction requires broader economic changes like market access, education, and equitable business condition which microcredit often overlooks microfinance often overlooks. Consequently, its effectiveness as a poverty reduction tool is inherently limited.
Banerjee et al. (2010) also noted that while microcredit has enabled some small businesses to thrive, its role in lifting people out of poverty may be overstated. They found that microcredit can offer temporary support for small-scale entrepreneurs, but there is insufficient evidence to suggest it leads to significant, long-term reductions in poverty. The high-interest rates and short repayment periods that characterize many microfinance schemes often exacerbate financial struggles rather than resolving them, trapping borrowers in debt cycles that counteract any initial benefits. In some cases, reliance on credit alone can even lead to dependency and disempowerment, especially when high interest and frequent repayments further strain already limited resources.
Impact on Social Well-Being and Government Intervention
In communities across Africa and Southeast Asia, microfinance debt has been linked to intense social pressures and mental health concerns. Borrowers who cannot repay their loans on time are sometimes subjected to public shaming, damaging their reputation and self-esteem. In Nigeria, on August 11, 2021, a concerned citizen, Dennis Ekwere, launched a petition on Change.org urging the Central Bank of Nigeria and other federal agencies to restrict microfinance institutions from using defamation as a debt recovery tactic. Responding to public outcry, Nigeria’s FCCPC began acting against these practices on March 11, 2022.
In an FCCPC post on X (formerly Twitter), many Nigerians expressed gratitude for the government’s intervention. One user, Zamzy, shared a heartbreaking story, commenting, “I just lost my uncle… they collected a loan from Aimloan and Lcredit to pay for medical bills; his due date was 2 days ago. My cousin planned to pay by month-end, but the lenders sent out defamatory messages, and my uncle fell this morning.” Such practices undermine the original social objectives of microfinance, imposing additional stress and often leading to tragic consequences for already vulnerable borrowers.
In response to the FCCPC’s intervention, another X user, iammizorente, shared a poignant reflection: “I am sure my friend who committed suicide because of loan sharks would be smiling now… this is like a dream come true already… these people have done a lot of harm to innocent Nigerians”. This account highlights the severe psychological impact and distress caused by debt pressures, which, in some cases, can tragically push borrowers to irreversible outcomes. Such stories starkly reveal the potential harm of microfinance debt on social and mental well-being, particularly in vulnerable communities, challenging the initial intent of microfinance to empower the financially marginalized. In the article “Microfinance has generated returns for banks and government aid agencies—and exploited millions” on Bloomberg reveal that five of the largest development banks committed almost $15 billion to microfinance and small-business lenders in more than 80 countries from 2011 to 2020, sadly the same reveals that In Sri Lanka, advocacy groups estimate 200 women to have committed suicide within 2019 to 2022 due to inability to repay their loan taken from microcredit.
Conclusion
Microcredit was originally envisioned as a mechanism to empower the impoverished by providing accessible financial resources. However, the commercialized, profit-driven evolution of microcredit has frequently led to debt cycles, financial instability, and social stress, proving ineffective in achieving sustainable poverty eradication. Although MFIs alone cannot resolve all systemic issues related to poverty, they could play a more constructive role by integrating broader support mechanisms. As Yunus (2006) envisioned, microfinance should ideally foster mutual trust, accountability, and participation, creating a system that genuinely works for impoverished communities.
MFIs should consider revamping their mechanisms and integrating support mechanisms into their lending practices, such as Financial Literacy Programs, Business Training and Mentorship, Flexible Loan Terms and Grace Periods, Savings Programs, and Insurance and Risk Mitigation. For example, FINCA’s financial literacy programs have significantly improved financial outcomes for poor people across regions. BRAC in Bangladesh has successfully implemented business training for micro businesses. Kiva is a good example of an MFI that supports borrowers globally by offering flexible repayment plans, resulting in higher repayment satisfaction and success rates for their borrowers. They are not perfect models for microcredit schemes, but they offer some services that could enhance the sustainability of the scheme for themselves and their users. By embracing a more holistic, supportive approach to lending, MFIs can become true partners and investors in borrowers success, helping to eradicate poverty and aligning with the inclusive financial model envisioned by microfinance pioneers like Professor Yunus.