Poverty Reduction Efforts: Does Microcredit Help?

The popularity of microcredit has grown in recent years, as more and more organizations view it as an important tool in the eradication of poverty. However, there exists considerable debate within development literature as to whether microcredit reaches the poorest of the poor (who are often the principal target of development initiatives that use microcredit as a tool), and furthermore, whether it serves as an effective tool for poverty reduction. This article provides reasons as to why microcredit may fail to reach the poorest, and outlines the main arguments in the impact debate. This article further argues that current evidence, which suggests a marginally positive impact of microcredit in reducing poverty, may not be significant enough to justify the vast amounts of funds that are channeled into microcredit activities under the premise of poverty reduction. Finally, this article provides recommendations to increase the effectiveness of microcredit in targeting the poorest and reducing poverty.