Paper

Microfinance: A New Way of Development?

How important is social capital for the success of microfinance?
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This paper seeks to investigate why similar microfinance projects, with basically the same characteristics, worked in some countries and not in others.

The paper states that:

  • The first examples of group lending, which appeared in the 19th century in Europe; contributed to the economic and social development of those areas;
  • Analyzing the characteristics of those successful experiences can help in understanding modern failures and successes;
  • Microfinance is more likely to succeed where a tradition of cooperation, association and social interaction is already established within the society.

The paper discusses:

  • The conditions necessary for the development of a sound microfinance sector;
  • The basic requirements that make microfinance an efficient way to provide credit;
  • A game theoretical model to explain the functioning of the lending mechanism used by microfinance institutions (MFI)s and the conditions that ensure the success of the program;
  • The role that social capital plays in the success of an MFI;
  • The impact that a sound microfinance system can have on the social and political conditions of the groups involved.

The paper concludes by presenting the experience of Ecuador, a country rich in social capital, where microfinance has played a fundamental role in the economic and political development of the poorest regions.

About this Publication

By Ronchi, P.
Published